broadband infrastructure deployment appendix ii - empiris llc

Before theDEPARTMENT OF AGRICULTURE

RURAL UTILITIES SERVICEWashington, DC

In the Matter of

American Recovery and Reinvestment Act

Docket No. 090309298-9299-01Broadband Initiatives

COMMENTS OF THE FIBER-TO-THE-HOME COUNCILIN RESPONSE TO REQUEST FOR INFORMATION

Thomas W. CohenKelley Drye & Warren LLP

3050 K Street NW, Suite 400Washington, DC 20007(202) 342-8518 (telephone)(202) 342-8451 (facsimile)TCohenna,kel leydrye. comCounsel to the Fiber-to-the-HomeCouncil

March 26, 2009

TABLE OF CONTENTS

Page

EXECUTIVE SUMMARY ............................................................................................................ i

1. Rural Utilities Service High Speed Broadband Program ................................................... 2

A.

.

C.

D.

E.

The New Law Creates Unique Opportunities and Challenges .............................. 2

1.

Use the ARRA funding exclusively for grants .......................................... 3

2.

Streamline the application process, the program's requirements,and the process for awards and post-award implementation ..................... 4

Economic Growth and Development and Job Creation Drives the ARRA;Fiber-to-the-Home Deployments Drive Economic Growth andDevelopment and Job Creation .............................................................................. 5

The ARRA Provides a New and Specific Directive for RUS to Implement:Deploy Sufficient High Speed Broadband to Facilitate Rural EconomicDevelopment .......................................................................................................... 8

Statutory Priorities Should be Addressed in the System for ScoringApplications .........................................................................................................

15

Further Comments on the FTTH Council's Proposed Rules ............................... 16

1.

Application Periods, Award Deadlines, and Allocating Funds ............... 16

2.

Eligibility for Funding ............................................................................. 17

3.

Project Eligibility and Use of Grant Funds .............................................. 17

II. Conclusion .......................................................................................................................

18

Appendix I - Fiber-to-the-Home Council Proposed Rules to Implement Rural UtilitiesService Broadband Stimulus Grant Program

Appendix II - Empiris LLC Study on the Economic Effects of Tax Incentives forBroadband Infrastructure Deployment

EXECUTIVE SUMMARY

The Fiber-to-the-Home Council ("FTTH Council") is a non-profit trade associationdedicated to educating the public and government officials about fiber-to-the-home ("FTTH")and to promoting and accelerating FTTH deployment and the resulting quality of lifeenhancements FTTH networks make possible. It has approximately 250 members, of which

almost 150 are rural telephone companies. It thus has an intense interest in assisting the RuralUtilities Service ("RUS") in ensuring the success of the agency's new broadband program in theAmerican Recovery and Reinvestment Act of 2009 ("ARRA').

The new broadband program presents the agency with a great opportunity to ensure thatrural areas have access to high-speed broadband infrastructure - the same infrastructure that isbeing deployed rapidly in urban areas throughout the country. It also presents the agency with adaunting task: awarding $2.5 billion in funding by September 30, 2010. The FTTH Council'scomments seek to enable the agency to successfully seize this opportunity and addresschallenging issues by providing specific proposals - and support for these proposals - onmandates in the new statute. In addition, the Council appends to these comments a complete setof rules to implement its proposals. It welcomes the opportunity to meet with the agency todiscuss these more fully. The following summarizes key proposals in the FTTH Council'scomments:

1. The purposes of the ARRA are first and foremost to immediately create jobs and economicoutput and make investments in infrastructure that provide long-term benefits. The agency'sbroadband program needs to fit within that larger framework and then implement its new

directive to provide for the deployment of high-speed broadband service to facilitate ruraleconomic development. The RUS accordingly should give priority to projects that: create themost jobs; can be initiated promptly by an experienced entity; and deploy infrastructure thatspurs rural economic development. The deployment of FTTH networks fulfills all of theserequirements. In particular, there is substantial evidence showing that FTTH networks generatea significant number of jobs and enable robust long-term economic development.

2. The new broadband program has a specific directive, one that takes precedence over previous

agency rules and requirements. Projects must be in areas that are at least 75 percent ruralwithout sufficient access to high speed broadband service to facilitate rural economicdevelopment. There are many crucial decisions the agency must make in implementing thisdirective. The FTTH Council believes there are cogent reasons for the agency to define the term"high-speed" as: a wireline or point-to-point fixed wireless service providing an informationtransfer rate equivalent to at least 25 Mbps downstream and at least 6 Mbps upstream. TheCouncil also urges the agency to define "without sufficient access to high-speed broadbandservice" to mean: more than 33% of the customers (either residential or business or both) to beserved by the project currently lack access to a provider of such service.

3. Because funding for the program is far in excess of the usual annual appropriations for theRUS and funding must be awarded by September 30, 2010, the FTTH Council believes that theagency should award only grants - and not loans or loan guarantees - and should adopt astreamlined process for evaluating applications consistent with prudent management.

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Before theDEPARTMENT OF AGRICULTURE

RURAL UTILITIES SERVICEWashington, DC

In the Matter of

American Recovery and Reinvestment Act ) Docket No. 090309298-9299-01Broadband Initiatives )

COMMENTS OF THE FIBER-TO-THE-HOME COUNCILIN RESPONSE TO REQUEST FOR INFORMATION

The Fiber-to-the-Home Council ("FTTH Council"), through its undersigned

counsel, hereby respectfully submits its comments to the Department of Agriculture,

Rural Utilities Service ("RUS") in response to the March 12, 2009 Federal Register

notice for comments ("Notice") to implement the Broadband Initiatives in the American

Recovery and Reinvestment Act of 2009 ("ARRA").1

The FTTH Council is a non-profit organization established in 2001. Its mission is

to educate the public and government officials about fiber-to-the-home ("FTTH") and to

promote and accelerate FTTH deployment and the resulting quality of life enhancements

FTTH networks make possible. The FTTH Council's members represent all areas of the

broadband access industry, including telecommunications, computing, networking,

1 In the Matter ofthe American Recovery and Reinvestment Act of 2009 BroadbandInitiatives, Request for Information, Docket No. 090309298-9299-01, Rel. March12, 2009.

1

system integration, engineering, and content-provider companies, as well as traditional

service providers, utilities, and municipalities.Z

1.

Rural Utilities Service High Speed Broadband Program

A.

The New Law Creates Unique Opportunities and Challenges.

The ARRA is a unique and highly specific law, driven by a challenging economic

climate and designed to create economic output and jobs as expeditiously as possible.

Federal agencies thus need to align their implementation of the legislation with these

paramount objectives. Simply because the ARRA has included funding for activities that

are somewhat similar to what an agency has undertaken in the past does not mean the

agency should go about "business as usual" and just replicate its old practices. Rather,

agencies need to develop new implementation schemes that adhere closely to the

purposes and text of the ARRA.

The ARRA, in providing $2.5 billion in funding for high speed broadband

deployment largely in rural areas, presents the RUS with a daunting task, even though the

agency has demonstrated expertise and experience in awarding broadband funding

through loans and grants. First, the amount of money that must be awarded is many

times larger than the normal annual appropriations for the RUS, yet the agency has only

until September 30, 2010 to complete the task. Second, the agency needs to rapidly take

the specific text and directives of the ARRA and develop new criteria upon which to

2 As of today, the FTTH Council has more than 200 entities as members. Acomplete list of FTTH Council members can be found on the organization'swebsite, hqp://www.ftthcouncil.org.

2

judge applications for funding. While there may be some overlap with the agency's

existing broadband programs, the new statute has specific objectives and requirements

that take precedence. Finally, the agency must accomplish all of this while continuing to

implement its ongoing broadband programs, which just received new appropriations.

Because of these challenges, the FTTH Council believes the RUS needs to deal

with the ARRA funding as a "one-shot" emergency program, requiring special

procedures and requirements. More specifically, the FTTH Council urges that the RUS:

1.

Use the ARRA funding exclusively for grants.

In the Notice, the agency notes that it "has struggled to find an effective way to

use the agency's current broadband loan program" and "believes that the authority to

provide grants" will help it achieve the goals of ensuring broadband access. The FTTH

Council strongly agrees with the agency on the value of grants to achieve its aims and

believes it should use the ARRA funding exclusively for grants. There are two key

reasons that heavily weigh in favor of such an approach. First, grants can be awarded

more expeditiously, requiring fewer resources and expenditures by the applicants and the

agency. This, of course, is critical given the primary economic aims of the ARRA. In

contrast, because the agency incurs the risk of default with a loan, it must engage in

substantial, time consuming, and costly due diligence in advance of any award (as well as

engaging in strict post-award audits and reporting over the life of the loan). With the

strict time limits of the ARRA, the agency does not have the luxury of engaging in such a

drawn out process, and a grant process should cost much less for the applicants and the

agency. Second, the level of grant funding in the ARRA is already so substantial that it

can be used for a large number of awards with significant impact in rural areas. The

agency, for instance, could use the funding to award 250 grants at an average of $10

3

million each. It should be noted that from FY 2003 through FY 2008, for the broadband

loan program, the agency made 85 loans worth almost $1.6 billion or approximately $20

million per loan. Thus, while leveraging federal funds through making loans can be

advantageous, given the objectives of the ARRA, there is no pressing need to do so here.

2.

Streamline the application process, the program's requirements,and the process for awards and post-award implementation.

Because there is a need to expedite the processing of applications and initiation

and completion of projects, the FTTH Council believes the agency must streamline the

application process and remove, or at least limit, requirements that stand in the way of

simultaneously engaging in project design, construction, and installation (including

design-build or turn-key projects). In effect, the agency needs to create a "fast-track"

process from the application stage through service initiation. For example, elaborate

market surveys and detailed engineering design, while beneficial under normal

circumstances, cannot be seen as consistent with the need to commence and complete

projects expeditiously. Nor, is it beneficial that the agency require competitive bidding

for the supply of equipment and services post-award. Rather, the agency would improve

the quality of grant applications and speed deployments by eliminating this step and

permitting applicants to enter into agreements with vendors in advance of filing. Any

agreements, of course, would be noted in the application. In general, the agency should

rely on such industry-standard practices - such as the use of master contracts, prevailing

unit construction prices, and customary unit prices for the area - to expedite construction.

Streamlining the application process and program requirements can be achieved

fully consistent with the ARRA's requirement of "prudent management." The agency is

familiar with post-award reporting, oversight, and audit requirements, and it should apply

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these requirements to the new program. In addition, the FTTH Council believes the

agency should require the applicant to contribute at least 20 % matching funds to the

proj ect.

Of course, there is no reason - nor would it be desirable - for the RUS to reinvent

all of its practices and procedures for its ARRA broadband program. Of the two

broadband programs overseen by the agency, the FTTH Council believes the closer

model for its ARRA broadband program is the Community Connect Broadband Grant

program and not the Broadband Loan Program. To that end, it has appended to these

comments a set of proposed rules for the agency's implementation of its ARRA

broadband program, which are built upon the agency's grant program.3 Key aspects of

these proposed rules are discussed in the following sections. The FTTH Council stands

ready to meet with the agency at anytime to elaborate on its proposed rules and their

rationale.

B.

Economic Growth and Development and Job Creation Drives theARRA; Fiber-to-the-Home Deployments Drive Economic Growth andDevelopment and Job Creation.

At the beginning of the ARRA, the purposes and principles of the legislation are

clearly enunciated:

•

"Preserve and create jobs and promote economic recovery."

•

"Invest in ... infrastructure that will provide long-term economic benefits."

3

The proposed rules address the provision of fixed, and not mobile, broadbandservice.

4

5

6

•

"[Commence] expenditures and activities as quickly as possible consistent

with prudent management."4

These purposes are later echoed in the legislative language creating the new program for

RUS:

•

Facilitate rural economic development

•

Provide a priority for activities that are "fully funded," "can commence

promptly," and "can be completed."5

In a real sense, under the ARRA, broadband deployment is first and foremost a means to

the end of economic recovery and reinvestment, and only secondarily an end in its own

right. The RUS accordingly should give priority to projects that:

•

Create the most jobs;

•

Can be initiated promptly by an experienced entity; and

•

Deploy infrastructure that spurs rural economic development.

There is substantial evidence to support the conclusion that deployment of FTTH

infrastructure best fits these objectives for two reasons. First, in terms of immediate jobs

and economic output, FTTH deployments are enormous construction projects, involving

far more outside plant work than other technologies.6 This conclusion is supported by a

Public Law 111-5, Section 3 (a)(1), (a)(4), (b).

Public Law 111-5, Division A, Title I, Distance Learning, Telemedicine, andBroadband Program.

This conclusion is supported in the Conference Report on H..R 1 (the ARRA) (inthe section discussing the NTIA Broadband Technology Opportunities Program,Section 6001), which provides, "The Conferees are also mindful that theconstruction of broadband facilities capable of delivering next-generationbroadband speeds is likely to result in greater job creation and job preservationthan projects centered on current-generation broadband speeds."

6

recent study by the economic consulting firm Empiris, LLC, which was commissioned by

the FTTH Council, on the economic effects of tax incentives for the deployment of

broadband infrastructure. (A full copy of the report is appended to these comments.) Of

particular relevance to the discussion here, the report states:

[A] majority (54 percent) of capital spending required in outside plantbuild-out for FTTH is spent on construction. This heavy reliance onconstruction for FTTH is due in large part to the burying of newinfrastructure in the ground ...$1 million of investment in FTTHdeployment will result in almost 20 jobs, whereas a million dollars ofinvestment in wireless broadband will result in fewer than 15 jobs. This islargely due to our estimate that only 7 percent of wireless broadbandcapital expenditures go to the construction industry.

In addition to the immediate benefits of creating economic growth and jobs, in

terms of economic development, FTTH deployments provide by far the most capabilities

(through higher symmetrical bandwidth) for customers to send and receive data and

video, and these networks are "future-proof." Once the fiber is installed, upgrading the

capabilities of the network is readily accomplished by changing the electronics. In

addition, fiber networks are most valuable to businesses, which increasingly demand

dedicated amounts of symmetrical bandwidth, and to their employees. As the former

Mayor of Ft. Wayne, Indiana, Graham Richard, stated on March 16, 2009, at a meeting

of the National League of Cities, "If you don't have [FTTH], [companies] won't invest in

your city. [Broadband deployment] is just as important as public safety, water and sewer

7 A 2007 survey sponsored by the FTTH Council found that "a substantial portionof Americans who get their home Internet services through direct fiber opticconnections are using those services to telecommute an average of one-third ofthe time or to run their own home-based businesses," See,http : //www. ftthcouncil. org/?t=262.

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systems."8 Of course, the RUS is familiar with these benefits, as over one-third of its

broadband loans have gone to FTTH projects. Given the new aims of the ARRA's

broadband program, one would expect this to increase.

C.

The ARRA Provides a New and Specific Directive for RUS toImplement: Deploy Sufficient High Speed Broadband to FacilitateRural Economic Development.

The RUS has a lengthy history of seeking to provide access to broadband in rural

areas and has created two programs dedicated to achieving that goal. While the ARRA's

directive for the agency also involves deployment of broadband infrastructure to rural

areas, it is different and takes precedence over prior law and regulation:

[N]otwithstanding title VI of the Rural Electrification Act of 1936, thisamount [$2.5 billion] is available for grants, loans, and loan guarantees forbroadband infrastructure in any of the United States: Provided further,That at least 75 percent of the areas to be served by a project receivingfunds from such grants, loans, or loan guarantees shall be in a rural areawithout sufficient access to high speed broadband service to facilitate ruraleconomic development.

In interpreting this directive, the agency needs to adhere closely to the text and give

natural meaning to each requirement such that, in the end, the program achieves the

fundamental aim of deploying sufficient high speed broadband service to facilitate rural

economic development. The FTTH Council believes the following specific

interpretations best fit with the rules of statutory interpretation and the intent of the

Congress, particularly in light of prior agency regulations and policies:

1. Rural Area means any geographic area described by Census Tracts9, asconfirmed by the latest decennial census of the Bureau of the Census,

8 See TR Daily, Local Involvement Urged in ARRA Grant Program, March 16,2009. It should be noted that Mayor Richard stated that job creation was the"number one" benefit from FTTH deployment.

8

9

10

11

12

which is not located within: (1) the boundaries of an Urban Area; or (2)an incorporated city or town with a population of more than 20,000.

This definition follows the agency's proposed regulations for the broadband loan

program, which also are reflected in the 2008 Farm Bill provision.10 It therefore is

consistent with the latest consensus definition of federal policymakers.

2. High Speed Broadband Service means, for a wireline or point-to-pointfixed wireless service, providing on an advertised and generally availablebasis to each customer from the internet access node an informationtransfer rate equivalent to at least 25 megabits/second from the provider tothe customer (downstream) and at least 6 megabits/second from thecustomer to the provider (upstream)."

The legislation's use of the term High Speed Broadband Service, as opposed to simply

broadband service, is of particular importance. 12 The agency clearly needs to distinguish

from its earlier-used, relatively low transmission speeds and establish a new benchmark.

Important policy and economic development concerns are driving this new mandate:

Congress wants rural customers to have access to broadband services with the same

capabilities as those available to urban customers to facilitate their economic

development and enhance the quality of life, and it is clear that many urban customers

The FTTH Council uses Census Tracts to describe geographic areas because theyare known and relied upon by the Federal Communications Commission in theBroadband Reporting Form (FCC Form 477), which can serve as a source for theagency to use in confirming information. The FCC Form 477 also segmentsbroadband service into groups (Rate Codes) based on transmission speeds. TheFTTH Council references these Rate Codes in these comments.

Rural Broadband Access Loans and Loan Guarantees, Proposed Rule, FederalRegister, Vol. 72, No. 91, rel. May 11, 2007. Public Law 110-246, Sec. 6110.

The downstream speed fits within Rate Code 8 of the FCC Form 477, and theupstream speed within Rate Code 6.

The 2008 Farm Bill, enacted a short time ago, only used the term, broadbandservice.

9

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14

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already have access to high-speed broadband and many more will have access over the

next few years.

The agency can readily determine the performance characteristics for the high-

speed broadband services received by urban customers. Verizon's FiOS network, for

instance, today provides a 50 Mbps downstream - 20 Mbps upstream service. This

network will pass approximately 18 million households by the end of 2010 - almost 20%

of the nation's households.13 Comcast, the nation's largest cable company, offers its

"Extreme 50" service (50 Mbps downstream - 10 Mbps upstream) in select markets, and

this service will be provided to approximately 10 million homes soon. 14 Cablevision,

another major cable operator, currently offers a 30 Mbps /5 Mbps service .15 AT&T's U-

verse, which will pass approximately 30 million households by the end of 2010, today

provides a 18 Mbps/1.5 Mbps service.16 These performance characteristics are, of

course, snapshots of the current market, and, given the previous growth rates, the agency

should conclude that even higher-speeds will be available in the next few years - when

the networks built by the broadband stimulus grants are completed. The FTTH Council

thus believes that the agency should define high-speed broadband service at the very least

as 25 Mbps downstream - 6 Mbps upstream.

See, http:Hinvestor.verizon.com/news/view.aspx?NewsID=925.

See, http://www.cmcsk.comZphoenix.zhtml?c=118591&p=irol-newsArticle&ID=1215838&highlight=. Comcast's current, general high-speedoffering is 16 Mbps/2 Mbps.

See, http://www.optimum.com/order/boost/.

16

17

18

19

Additional support reflecting recent Congressional intent can be found in the

definition for "advanced broadband service" used in the House version of the NTIA

broadband stimulus program in the ARRA - "at least 45 megabits per second

downstream and at least 15 megabits per second upstream. ,17 While this definition was

not included in the final bill, Congress required NTIA to favor applications for grants that

offered the "greatest possible broadband speeds."18 Clearly, Congress understands that

higher speeds provide the greatest capabilities for customers - in addition to leading to

the greatest benefits in terms of economic growth and job creation. The FTTH Council

would welcome the agency's adoption of the definition provided by the House but also

believes the definition provided above is sufficient to achieve the ARRA's intent.

Finally, to provide a further benchmark for the definition of high-speed, the

agency should note that Tier 3 rural incumbent local exchange carriers, which serve

approximately 8 million households, have aggressively deployed FTTH. Three-quarters

of these carriers either have started providing FTTH or will initiate deployments in the

next several years. Today, over 12% of these rural households are passed by fiber. 19 For

the agency to require anything less than FTTH performance capabilities for grant projects

would place those areas at an economic disadvantage.

See, http://www.att-services.net/att-u -verse/uverse-intemet.html.

See, Section 10020), H.R. 629, 111 Ih Congress.

See, Sec. 6001, Conference Report on H.R. 1.

Overview: ILEC vs. Muni-Fiber Builds, Michael Render, The FTTH Prism,March 2009, p. 15.

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3. Insufficient Access to High Speed Broadband Service means more than33% of the customers (either residential or business or both) to be servedby the project currently lack access to a provider of such service.20

As with the discussion on the definition of high-speed in the prior section, the

term "without sufficient access" to high-speed broadband service for a rural area should

be viewed in light of access in urban areas. Verizon's FiOS service will reach

approximately 50% of the carrier's total access lines by the end of 2010, but the "access

rate" for urban areas is even greater since this includes lines in rural areas. AT&T's U-

verse service will reach approximately the same percentage of the carrier's lines by the

end of 2010, but, again, many of these lines are in rural areas. Moreover, as noted above,

the growth rate for access to the lines in urban areas will continue to increase.

In addition, the "sufficient access" needs to be read in relation to the phrase that

follows, "to facilitate rural economic development." That means "sufficient access"

should at the very least require that access be provided to a large enough number of

customers, both business and residential, to spur economic development, including such

critical activities as distance-learning and telemedicine applications. Based on this

concern and on the need to ensure equivalent "sufficient" access to that provided in urban

areas, the FTTH Council has proposed a high threshold for determining "sufficient

access."

4. Facilitate Rural Economic Development means the deployment of aBroadband System (capable of providing High Speed Broadband Service)to a Community and its customers that can be readily upgraded to provideinformation transfer rates in excess of those currently provided and at leastcomparable to those in Urban Areas.

20

Prior to finding that sufficient access exists, the agency should ensure that anyexisting provider is viable and that its service is sufficiently substitutable with theBroadband Service proposed in the application.

In the Notice, the agency asks numerous questions about how it should interpret

the term "rural economic development." The FTTH Council believes the agency's focus

should be on ensuring that rural areas have broadband infrastructure capable of providing

High Speed Broadband Services that is equivalent to that provided in urban areas. As

noted above, once that infrastructure is in place, it will spur economic development by

attracting businesses that require such capabilities and providing customers with the

ability to access vital applications.

There is more than ample evidence to support the conclusion that FTTH networks

drive economic development, including in rural areas. In one study, a majority of FTTH

network operators concluded that these networks attracted new businesses, including in

such small towns and rural areas as Bristol, Virginia and Bristol, Tennessee, which

successfully attracted Media General, Northrup Grumman, and CGI.21 A "Fiber User

Survey" by Strategic Networks Group of three FTTH communities provides further

evidence of the economic impact these networks by finding: there was an "average

increase in sales of $21,017 per organization reporting," "average cost savings per

organization of $2,951," and a net increase in employment of 10.1%."22 It is thus not

surprising to hear the former mayor of Ft. Wayne state:

The benefits of a big pipe in a small town are clear. Communities that donot make high-speed broadband services available to residents and

Municipal Fiber to the Home Deployments: Next Generation BroadbandDeployment as a Municipal Utility, April 2008, pp. 3-4. (Located at:www.fthcouncil.org)

Fiber User Survey, Uses and Impacts of FTTH in Bristol, Virginia, StrategicNetworks Group, April/May, 2007, p.6. (Located at: www.ftthcouncil.org)

21

22

23

24

businesses will lose out in the economic development race... [U]ltimately,these high-speed broadband services will play a large role in keepingsmall towns not just viable but desirable places to live and work. 23

5. Link with Unserved and Underserved Areas

The agency inquires in the Notice about the existence of any link between the new

directive and the terms "unserved" and "underserved" used in the directive for the NTIA

program. While coordination between the two new broadband programs is important -

and there is an overlap with their objectives since both are part of the ARRA - the

legislative language of each is distinct, and it must control. Thus, the service areas in

applications to the Agency under the new program are required to be at least 75% rural,

but there is no requirement that they be unserved or underserved. The only legislative

mandate to the agency regarding unserved areas is that it give a priority to applications

also seeking to provide service to the "highest proportion of rural residents that do not

have access to broadband service." Of course, it would make most sense for the two

agencies to adopt the same definition of an unserved area to ensure there is no overlap in

funding and that funding is awarded most efficiently to those areas. The FTTH Council

proposes that the following definition be used:

Unserved Area means a geographic area described by Census Tractswhere more than 20% of the customers (either residential or business orboth) to be served by the project currently lack access to a provider ofBroadband Service.24

Broadband Fiber Networks: The 21 S` Century Crossroads, Graham Richard, to bepublished in Broadband Properties magazine in April, 2009.

The FTTH Council proposes that Broadband Service means Current Generationand High Speed Broadband Services, and Current Generation Broadband Servicemeans, for a wireline or point-to-point fixed wireless service, providing on anadvertised and generally available basis to each customer from the internet accessnode an information transfer rate equivalent to at least 6 megabits/second (FCCRate Code 6) from the provider to the customer (downstream) and at least 1.5

... Continued

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As for underserved areas, despite the agency having no mandate, coordination between

the two agencies again is necessary to ensure funding is not awarded for the same service

areas.

D.

Statutory Priorities Should be Addressed in the System for ScoringApplications.

In addition to the new directive, the legislation establishes a series of priorities for

awarding funding. These priorities are diverse, and, in the case of priorities for

competition and unserved areas, mutually exclusive. The FTTH Council believes the

agency should account for these priorities in its system for scoring applications, and it

proposes the following 100 point system, which also accounts for the critical priorities

established in the ARRA and in the directive establishing the new program. More

specifically, the largest group of points is awarded for economic growth/development and

job creation and then for deploying superior broadband infrastructure which will propel

economic development. Additional points are awarded for being in any of the "priority"

categories and then for connecting and serving community anchor institutions. The

complete methodology for determining the points to be awarded can be found in the

proposed rules attached to these comments.

SCORING CRITERIA

•

Jobs Creation (up to 20 points).•

Project Feasibility, Initiation, and Completion (up to 20 points).•

Feasibility (up to 10 points).

megabit/second (FCC Rate Code 4) from the customer to the provider (upstream).The FTTH Council proposes a different threshold for unserved areas than areaswith insufficient access to high-speed broadband to provide a greater incentive toserve customers in unserved areas when deploying projects.

•

Initiation and Completion (up to 10 points).•

Project Scope and Cost (up to 10 points).•

Infrastructure Capabilities and Long-Term Sustainability (up to 20points)•

Broadband Transmission Speed (15 points).•

Long-Term Sustainability (up to 5 points).•

Affordability (5 points)•

Competition or Unserved Area Preference (10 points).•

Rural Utilities Service Borrower's Preference (10 points).•

Community institution connectivity and community institution support (up

to 5 points).

E.

Further Comments on the FTTH Council's Proposed Rules.

1.

Application Periods, Award Deadlines, and Allocating Funds.

As discussed above, the agency's new broadband program has many unique features,

including a new directive and priorities and substantial funding that needs to be awarded

expeditiously and in full by September 30, 2010. To accommodate all of these features

and to give entities the maximum opportunities to file applications that best meet the

program's objectives consistent with prudent management, the FTTH Council believes

the agency should create three filing windows - with filing dates on July 1, 2009,

November 1, 2009, and April 1, 2010 - and seek to issue awards within 90 days of the

filing date. The agency should seek to award approximately one-third of the funds in

each window but can add any funds not awarded in the first two windows to a subsequent

window. All applications should be complete when filed, although the agency may ask

for clarifications, and any application that is rejected or denied in the first two windows

can be filed in a later window. To assist the agency in ensuring the ARRA's

requirements are met, the FTTH Council believes the agency should immediately post

applications on its website and accept comments on them for a period of 30 days.

2.

Eligibility for Funding.

The ARRA does not limit who can apply to receive an award of the agency's

broadband funding, and it would be in the best interest of the program for the agency to

receive applications from as many credible sources as possible. The agency therefore

should adopt the following expansive eligibility requirements:

To be eligible for a grant under the Program, an applicant shall:(a) Be legally organized as an incorporated organization, an Indian tribe ortribal organization, as defined in 25 U.S.C. 450b (b) and (c), a state or local unitof government, or other legal entity, including cooperatives or privatecorporations or limited liability companies organized on a for-profit or not-for-profit basis.(b) Have the legal capacity and authority to own and operate facilities toprovide Broadband Service as proposed in its application, to enter into contractsand to otherwise comply with applicable federal statutes and regulations.

3.

Project Eligibility and Use of Grant Funds.

The ARRA's directive for the agency's new broadband program establishes

which projects are eligible to receive funds and how those funds are to be used. Because

the essence of the ARRA is economic recovery and reinvestment - and the broadband

program's directive is driven by existence of insufficient access to High Speed

Broadband Service to facilitate rural economic development -- the agency's broadband

funding should only fund the construction of infrastructure over which High Speed

Broadband Service is offered. By doing so, the agency would be ensuring that these

largely rural areas should receive "future-proof' networks to propel their economic

growth. As for using grant funding for other purposes, the FTTH Council believes the

agency should permit a minor exception to having funding only go to infrastructure

deployment and allow grantees to use funding to provide free access for community

anchor institutions and vulnerable populations for a period of two years once service is

initiated.

Project Eligibility

To be eligible for a grant, the Project shall:(a) Deploy a Broadband System in a Service Area where at least 75% of thearea to be served is a Rural Area without sufficient High Speed BroadbandService to facilitate rural economic development; and(b) Offer High Speed Broadband Service to customers within the proposedService Area.

Use of Grant Funds

(a)

Grant funds may be used to finance:(1) The construction, acquisition, or leasing of facilities to deploy a

Broadband System to a Service Area and all required facilitiesneeded to offer a High Speed Broadband Service to customerslocated within such area;

(2) Access to Broadband Service, including use of end-user equipmentand free access to service for a period of two years after service isinitiated to the customer, by Community Anchor Institutions;

(3) Access to Broadband Service, including use of end-user equipmentand free access to service for a period of two years after service isinitiated too the customer, by low-income, unemployed, aged, andotherwise vulnerable populations; and

(4) The purchase of land, buildings, or building construction needed tocarry out the project.

(b)

Operating expenses incurred in providing such service are ineligible forgrants, except as provided in subsections (a)2) and (a)(3) of this section.

II.

Conclusion

In these comments, the FTTH Council has sought to provide the RUS with

a roadmap, based on the experiences of its members, on how to navigate through the new

statutory directive in the ARRA to achieve its objectives. The Council believes that by

following this roadmap the agency can seize the tremendous opportunity provided by this

new program and provide "future-proof' FTTH infrastructure to a great many areas in

rural America to facilitate their economic development. It stands ready to assist the

agency in this challenging undertaking.

Respectfully submitted,

Thomas W. CohenKELLEY DRYE & WARREN LLP

3050 K Street NW, Suite 400Washington, D.C. 20007(202) 342-8518 (telephone)(202) 342-8451 (facsimile)[email protected]

March 26, 2009

FTT Hc unca }er to the home

FIBER-TO-THE-HOME COUNCILPROPOSED RULES TO IMPLEMENT

RURAL UTILITIES SERVICEBROADBAND STIMULUS GRANT PROGRAM

Submitted to the Department of Agriculture, Rural Utilities Serviceon March 26, 2009 in Docket No. 090309298-9299-01

FIBER-TO-THE-HOME COUNCILPROPOSED RULES TO IMPLEMENT

RURAL UTILITIES SERVICEBROADBAND STIMULUS GRANT PROGRAM1

SEC. 1000. PURPOSES OF GRANT PROGRAM (HIGH SPEED BROADBANDSERVICES) ..........................................................................................................................3

SEC. 1001.

DEFINITIONS ......................................................................................................................4

SEC. 1002.

PROCESS AND TRANSPARENCY ...................................................................................6

SEC. 1003.

ELIGIBLE APPLICANT ....................................................................................................10

SEC. 1004.

ELIGIBLE PROJECT .........................................................................................................11

SEC. 1005. USE OF GRANTS FOR THE PROVISION OF HIGH SPEED BROADBANDSERVICES ..........................................................................................................................12

SEC. 1006.

FILING OF APPLICATIONS FOR PROJECTS ...............................................................13

SEC. 1007. APPLICATION INFORMATION REQUIREMENTS ......................................................16

SEC. 1008. SCORING OF APPLICATIONS TO DETERMINE AWARDS .......................................19

SEC. 1009. GRANT DOCUMENTATION AND DISTRIBUTION OF FUNDS ................................22

SEC. 1010. POST-AWARD REPORTING, COMPLIANCE, MODIFICATION, ANDPENALTIES .......................................................................................................................23

i The rules proposed herein focus on the provision of fixed, and not mobile, service.

2

Fiber-to-the-Home CouncilProposed Rules to ImplementRural Utilities ServiceBroadband Stimulus Grant ProgramMarch 26, 2009

See. 1000. PURPOSES OF GRANT PROGRAM (HIGH SPEED BROADBAND SERVICES)(a) The American Recover and Reinvestment Act of 2009 (the "Act") seeks to preserve and

create jobs and promote economic recovery and invest in infrastructure that will providelong-term economic benefits. The Act implements these purposes in part by authorizingand appropriating funds that, notwithstanding title VI of the Rural Electrification Act of1936, would be available through grants (as well as loans and loan guarantees) for projectsto construct, as expeditiously as possible consistent with prudent management, broadbandinfrastructure in any geographic area throughout the United States where at least 75% ofthe area to be served is a Rural Area without sufficient High Speed Broadband Service tofacilitate rural economic development.

(b) The Agency shall give priority in awarding grants to project applications for BroadbandSystems: that will deliver end users a choice of more than one High Speed BroadbandService provider; that provide High Speed Broadband Service to the highest proportion ofrural residents in an Unserved Area; from, or including, borrowers or former borrowersunder Title II of the Rural Electrification Act of 1936; that demonstrate that, if theapplication is approved, all project elements will be fully funded; that can be completed ifthe requested funds are provided; and, that can commence promptly following approval.No area of a project funded with amounts made available herein may receive funding toprovide Broadband Service under the Broadband Technology Opportunities Program.

3Fiber-to-the-Home CouncilProposed Rules to ImplementRural Utilities ServiceBroadband Stimulus Grant ProgramMarch 26, 2009

See. 1001.

DEFINITIONS(a)Administrator means the Administrator of the Rural Utilities Service, or his or her

designee.(b)Agency means the Rural Utilities Service, which administers the funds authorized and

appropriated by the Act.(c)Broadband Service means Current Generation Broadband Service or High Speed

Broadband Transmission Service that enables customers to access the internet at least atthe speeds required herein between the customer and the internet access node.

(d)Broadband System means transmission system infrastructure over which a High SpeedBroadband Service is being provided.

(e)Community means any incorporated or unincorporated town, village, or boroughrecognized in the latest decennial census as published by the Bureau of Census.

(f)Current Generation Broadband Service means, for a wireline or point-to-point fixedwireless service, providing on an advertised and generally available basis to each customerfrom the internet access node an information transfer rate equivalent to at least 6megabits/second from the provider to the customer (downstream) and at least 1.5megabit/second from the customer to the provider (upstream).

(g)Community Anchor Institutions means public schools or education centers, public libraries,medical clinics, hospitals, community colleges, public universities, or law enforcement,fire and ambulance facilities.

(h)Customer means a household or business as measured by the U.S. Census.(i)Eligible Applicant shall have the meaning as set forth in Sec. 1003.

0)

Eligible Grant Purposes shall have the meaning as set forth in Sec. 1005.

(k)

End User Equipment means computer hardware and software, audio or video equipment,computer network components, telecommunications terminal equipment, inside wiring,interactive video equipment, or other facilities required for the provision and use of HighSpeed Broadband Service.

(1)

Facilitate Rural Economic Development means the deployment of a Broadband System toa Community and its customers that can be readily upgraded to provide informationtransfer rates in excess of those currently provided and at least comparable to those inUrban Areas.

(m)Grantee means any entity receiving a grant.(n)High Speed Broadband Service means, for a wireline or point-to-point fixed wireless

service, providing on an advertised and generally available basis to each customer from theinternet access node an information transfer rate equivalent to at least 25 megabits /secondfrom the provider to the customer (downstream) and at least 6 megabits/second from thecustomer to the provider (upstream).

(o)Insufficient Access to High Speed Broadband Service means more than 33% of thecustomers (either residential or business or both) to be served by the project currently lackaccess to a provider of such service.

(p)Matching Funds means the applicant's qualified contribution to the project, as set forth inSec. 1006(e).

Fiber-to-the-Home Council

4

Proposed Rules to ImplementRural Utilities ServiceBroadband Stimulus Grant ProgramMarch 26, 2009

(q) Project means the applicant's proposed increase in the supply of Broadband Service for aspecific geographic area described by Census Tracts consistent with the purposes set forthin Sec. 1000 and which is to be financed by the grant and Matching Funds.

(r) Rural Area means any geographic area described by Census Tracts, as confirmed by thelatest decennial census of the Bureau of the Census, which is not located within: (1) theboundaries of an Urban Area; or (2) an incorporated city or town with a population of morethan 20,000.

(s) Service Area means, as described by Census Tracts, a Community (including theunincorporated geographic areas located outside and contiguous to the Community'sboundaries) or a series of Communities so long as they (and their unincorporated areas) arecontiguous, in which the applicant proposes to provide High Speed Broadband Service.

(t) Unserved Area means a geographic area described by Census Tracts where more than 20%of the customers (either residential or business or both) to be served by the projectcurrently lack access to a provider of Broadband Service.


Sec. 1002. PROCESS AND TRANSPARENCY(a) CONSISTENCY WITH MARCH 20, 2009 PRESIDENTIAL MEMORANDUM

The Presidential Memorandum of March 20, 2009 on ensuring responsible spending ofrecovery act funds (hLtp://www.whitehouse.gov/the press_office/Memorandum-for-the-Heads-of-Executive-Departments-and-Agencies-3-20-09/.) shall control the proceduresand transparency measures used by the Agency. The provisions in this section shall beused so long as they are consistent with that memorandum.

(b) PROGRAM WEBSITEThe Agency shall maintain a website ("Program website") to facilitate the exchange ofinformation with the public and applicants for grants. The website shall be updatedregularly and shall include links to copies of any Agency announcements, actions, ordecisions regarding the Program.

(c) PUBLIC NOTIFICATION OF FUNDING AVAILABILITY AND APPLICATIONDATES AND SUBMISSIONThe Agency shall publish in the Federal Register at least sixty (60) calendar days prior tothe due date for submission of applications set forth in Sec. 1006 a Notice of FundsAvailability ("NOFA") that shall set forth, at a minimum, the following: the total amountof funding available; the maximum and minimum funding for each grant; the proceduresfor the submission of applications; and, the appropriate addresses and agency contactinformation. Nothing shall preclude the Agency from determining that it is in the publicinterest to limit the total amount of funds that can be awarded to an applicant, including itsaffiliates, so long as the Agency issues a public announcement at least sixty (60) calendardays in advance of a particular filing period when that determination is to apply.

(d) PUBLIC NOTIFICATION OF AGENCY HEARINGS, WORKSHOPS, AND OTHEROFFICIAL AGENCY PROCEEDINGSThe Agency shall open to the public all conferences, meetings not subject to subsection(e), workshops, site visits, and its similar interactions with non-Agency persons, and theAgency shall provide notice of such activities on the Program's website at least five (5)calendar days in advance to facilitate public attendance

(e) PUBLIC INFORMATION AND INSPECTION OF RECORDS(1) Public posting of all Agency rulemakings and decisions. The Agency shall post all

information released relating to the Program, including but not limited torulemakings, comments, orders, and other decisions, on the Program's websitewithin two (2) calendar days of submission or release.

(2) Public posting of all applications for grants, comments on applications, stateendorsements of applications, awards of grants, denials or rejections of grants,grantee status reports, and grantee requests for modifications. The Agency shallpost applications for funding received under the Program, comments onapplications, state endorsements of applications, awards of grants, denials orrejections of grants, grantee status reports, grantee requests for modifications, andany other information transmitted between the Agency and the applicant or granteeon its website within two (2) calendar days of receipt.


6


(3) Confidential Business Information. An applicant for a grant may request thatmaterials or information submitted to the Agency be withheld from publicinspection.(A) Any party submitting information or materials to the Agency may submit

therewith a request that business information not be made routinelyavailable to parties requesting the applicant's information under theFreedom of Information Act ("FOIA," 5 U.S.C. § 552).(1) Applicants submitting applications and grantees submitting reports

are responsible for designating business information pursuant to theDepartment of Commerce's rules governing FOIA requests (15C.F.R. § 4.9).

(2) Along with the unredacted application or status report, such partiesshall provide a redacted copy of the application or status report forpublication on the Program website.

(B)

Requests for materials including business information will be handled asspecified by the Department of Commerce's rules governing FOIA requests(15 C.F.R. § 4.9).

(C)

If the materials are submitted voluntarily (i.e., absent any direction by theAgency), the person submitting them may request the Agency to return thematerials without consideration if the request for confidentiality should bedenied. In that event, the materials shall ordinarily be returned (e.g., anapplication shall be returned if it cannot be considered on a confidentialbasis). Only in the instance where the public interest so requires will thematerials be made available for public inspection.(1)

If submission of the materials is required by the Agency to pursuean investigation into fraud, waste, or abuse and the request forconfidentiality is denied, the materials shall be made available forpublic inspection.

(D)

If no request for confidentiality is submitted, the Agency assumes noobligation to consider the need for non-disclosure but may determine on itsown motion that the materials should be withheld from public inspection.

(E)

If a request for confidentiality is denied, the person who submitted therequest may, within five (5) business days, file an application for review bythe Agency. If the application for review is denied, the person whosubmitted the request shall be afforded five (5) business days in which toseek a judicial stay of the ruling. If these periods expire without action bythe person who submitted the request, the materials shall be returned to theperson who submitted them or shall be placed in a public file. Notice ofdenial and of the time for seeking review or a judicial stay shall be given bytelephone, with follow-up notice in writing. The first day to be counted incomputing the time periods established in this subsection is the day after thedate of oral notice. Materials will be accorded confidential treatment andnot disclosed to the requesting party until the Agency acts on any timelyapplications for review of an order denying a request for confidentiality,


7


and until a court acts on any timely motion for stay of such an orderdenying confidential treatment.

(F)

Third party owners of materials submitted to the Agency by another partymay participate in the proceeding resolving the confidentiality of thematerials.

PUBLIC COMMENTS(1) Public comments on rules and reports. Any person may submit comments on any

proposed rule, report to Congress, or any other report issued or received by theAgency related to funding under the Program. All such comments shall besubmitted electronically and shall be posted on the Program's website within one(1) calendar day of receipt by the Agency.

(2) Public comments on applications. Any person or entity may submit comments andany state may submit endorsements on any application for a grant within thirty (30)calendar days from the date on which the application is filed.

(3) Public comments on requests for modifications. Any person may submit commentson a grantee proposal for modifications (as set forth in Sec. 1010(d)) within fifteen(15) calendar days from the date on which the request for modification is filed.

(g) EXPARTE COMMUNICATIONS(1)

Ex Parte Communications Defined. An ex parte communication is any oral orwritten communication regarding a pending matter or proceeding, including anapplication for a grant, between a member of the Agency and any other party thatdoes not occur in an Agency public hearing, Agency workshop, or other officialAgency proceeding, or on the official Agency record for the proceeding.(A) Procedural discussions exempted. Public notice requirements do not apply

to communications between parties, including staff, for the purpose ofexchanging information on or otherwise discussing procedural issues.

(B) Federal intergovernmental meetings exempted. The Agency may meetwithout public notice with federal agencies for the purpose of discussingany matter.

(2)

Required Disclosure of Ex Parte Communications(A) Written presentations. A person who makes a written ex parte presentation

subject to this section shall submit no later than the next business day anelectronic copy of the presentation through the Program's website forinclusion in the pubic record. The presentation (and cover letter) shallclearly identify the proceeding to which it relates, including the identity ofan application for a grant, if any, shall indicate a full and complete copy hasbeen submitted through the Program's website, and must be labeled as an exparte presentation. If the presentation relates to more than one proceeding,a copy shall be filed for each proceeding.

(B) Oral Presentations. A person who makes an oral ex parte presentationsubject to this section shall, no later than the next business day after thepresentation, submit through the Program's website a memorandum whichsummarizes the new data or arguments. A memorandum shall contain asummary of the substance of the ex parte presentation and not merely a


listing of the subjects discussed. The memorandum (and cover letter) shallclearly identify the proceeding to which it relates, including the identity ofan application for a grant, if any, shall indicate that a full and complete copyhas been filed electronically, and must be labeled as an ex partepresentation. If the presentation relates to more than one proceeding, amemorandum shall be filed for each proceeding.


9Proposed Rules to ImplementRural Utilities ServiceBroadband Stimulus Grant ProgramMarch 26, 2009

Sec. 1003. ELIGIBLE APPLICANTTo be eligible for a grant under the Program, an applicant shall:(a) Be legally organized as an incorporated organization, an Indian tribe or tribal organization,

as defined in 25 U.S.C. 450b (b) and (c), a state or local unit of government, or other legalentity, including cooperatives or private corporations or limited liability companiesorganized on a for-profit or not-for-profit basis.

(b) Have the legal capacity and authority to own and operate facilities to provide BroadbandService as proposed in its application, to enter into contracts and to otherwise comply withapplicable federal statutes and regulations.


10


See. 1004. ELIGIBLE PROJECTTo be eligible for a grant, the Project shall:(a) Deploy a Broadband System in a Service Area where at least 75% of the area to be served

is a Rural Area without sufficient High Speed Broadband Service to facilitate ruraleconomic development; and

(b) Offer High Speed Broadband Service to customers within the proposed Service Area.

11

Fiber-to-the-Home CouncilProposed Rules to ImplementRural Utilities ServiceBroadband Stimulus Grant ProgramMarch 26, 2009

Sec. 1005. USE OF GRANTS FOR THE PROVISION OF HIGH SPEED BROADBANDSERVICES

(a) ELIGIBLE GRANT PURPOSESGrant funds may be used to finance:(1) The construction, acquisition, or leasing of facilities to deploy a Broadband System

to a Service Area and all required facilities needed to offer a High SpeedBroadband Service to customers located within such area;

(2) Access to Broadband Service, including use of end-user equipment and free accessto service for a period of two years after service is initiated to the customer, byCommunity Anchor Institutions;

(3) Access to Broadband Service, including use of end-user equipment and free accessto service for a period of two years after service is initiated too the customer, bylow-income, unemployed, aged, and otherwise vulnerable populations; and

(4) The purchase of land, buildings, or building construction needed to carry out theproj ect.

(b) INELIGIBLE GRANT PURPOSESOperating expenses incurred in providing such service are ineligible for grants, except asprovided in subsections (a)2) and (a)(3) of this section.


12


See. 1006. FILING OF APPLICATIONS FOR PROJECTS(a) ELIGIBLE PROJECTS

To be eligible for a grant, an Eligible Applicant shall submit an application pursuant to therequirements of this part for a project that is consistent with the Purposes of the Programset forth in Sec. 1000. Nothing shall preclude an applicant from applying for funding forgeographic areas included in previous Agency loans, loan guarantees, or grants so long assuch the proposed project is consistent with the requirements of this part.

(b) FILING GROUPS AND FILING PERIODS FOR APPLICATIONS(1)

Applications for projects shall be filed in any of three filing periods as follows:(A) July 1, 2009;(B) November 1, 2009;(C) April 1, 2010.

(2) An applicant who has an application denied or otherwise rejected may re-file thatapplication or one or more different applications in a subsequent filing period.

(3) Individual applicants may file more than one application in any filing period, butno more than one application related to any geographic area in the same filingperiod, and may not be granted more than one application over all filing periods inthe same geographic area.

(c) ELECTRONIC FILING ONLYAll applications, comments, and ex parte communications on applications shall besubmitted electronically as indicated on the Program's website.

(d) COMPLETE WHEN FILED AND CLARIFICATIONS(1) All applications shall follow the format set forth in Sec. 1007 and be completewhen filed. Any application not compliant with this requirement shall be rejected withoutprejudice for subsequent filing. Once a determination is made that an application isincomplete, the Agency shall notify the applicant of that status within one (1) calendar dayin writing and electronically.(2) The Agency may contact an applicant to clarify any statements, representations, orother information contained in the application. Notice of any such contact and theapplicant's response shall be posted within one (1) calendar day on the Program's website.

(e) MATCHING FUNDS AND WAIVERS OF REQUIREMENT(1)

The applicant must contribute Matching Funds which are at least twenty percent(20%) of the cost of the project and shall be in the form of -(A) Cash for eligible grant purposes.(B) In-kind contributions for purposes that could have been financed with grant

funds. In-kind contributions must be new or non-depreciated assets withestablished monetary values. Manufacturers' or service providers'discounts shall not be considered as Matching Funds.

(C) Services or facilities provided free of charge or at a reduced charge tocustomers of the project, so long as the value of the services and facilitiesare established by a reputable appraiser unaffiliated with the applicant.

(D) Costs incurred by the applicant, or by others on behalf of the applicant, forfacilities, installed equipment, or other services rendered prior to


submission of the completed application shall not be deemed to qualify asMatching Funds.

(2) Any financial assistance from federal sources shall not be deemed to qualify asMatching Funds unless there is a federal statutory exception specificallyauthorizing the federal financial assistance to be considered as such.

(3) The Agency may waive the requirement that the applicant provide Matching Fundsif the applicant files a petition with its application demonstrating with specificitythat the applicant has attempted to acquire funding from a substantial number ofsources, all these potential sources of funding have formally declined to providesuch funding, and its financial status, operations, and reporting are sufficient andsound. Nothing shall preclude the Agency from requiring an applicant whoseMatching Funds requirement is waived to post a performance bond whose value isequal to that of the grant and which amount will be paid to the U.S. Treasury in thevent the applicant defaults or does not otherwise complete the project in accordancewith the terms of the grant.

(4) Nothing shall preclude the Agency from providing a loan to an applicant that wouldbe used as Matching Funds.

(fl REVIEW OF APPLICATIONS(1) CONSISTENCY WITH MARCH 20, 2009 PRESIDENTIAL MEMORANDUM

The Agency, in awarding grants, shall comply with the Presidential Memorandumof March 20, 2009 on ensuring responsible spending of recovery act funds(http://www.whitehouse. og v/the press office/Memorandum-for-the-Heads-of-Executive-Departments-and-Agencies-3-20-09/).

(2) REVIEW PROCESSApplications conforming with the requirements of this part will be evaluatedcompetitively by a panel of Agency employees selected by the Administrator andwill be awarded points as described in the scoring criteria in Sec. 1008. Nothingshall preclude the Agency from using non-Agency employees, including from theprivate sector, to assist the panel in evaluating applications. In scoring theapplications, the Agency shall rely upon the information contained in theapplication or provided to the Agency upon request and upon its own knowledgeand expertise to determine the accuracy, weight, and credibility of any statementsand information included in the application as well as the feasibility of theproposed project. The Agency may consult with the Federal CommunicationsCommission and other federal agencies if necessary to ensure the accuracy ofstatements and information. Applications in each filing period shall be ranked bythe Agency, and the Agency shall award grants in rank order until all grant fundsallocated for the particular filing period and filing group are expended. TheAgency has sole discretion to determine the number and size of awards grantedconsistent with the ranking of applications.

(3) REVIEW PERIOD AND DEADLINES FOR AWARDSThe Agency shall complete the review of an application and determine whether toaward a grant for the proposed project no later than ninety (90) calendar days after


14


the final filing date for the first two filing periods (Rounds 1 and 2) and not laterthan September 30, 2010 for the final filing period (Round 3).

(g) NOTIFICATION OF AWARDSThe Agency shall formally notify an applicant electronically and in writing of a decision toaward or not award a grant, including the basis for awarding or not awarding a grant for anapplication, and shall post such decisions and grant documentation specified in Sec. 1009on the Program's website. Without limitation, the Agency shall specify the scoring pointsreceived.

(h) APPEALS OF AWARD DECISIONSAn applicant whose application is denied or otherwise rejected may file an appeal with theAgency within fifteen (15) calendar days of the date of formal notification of denial orrejection and seek to have a grant awarded. The appeal shall be accompanied bydocumentation providing with specificity the rationale and evidence that would support theaward of a grant. The Agency shall act on the appeal within forty-five (45) calendar daysand shall award a grant only if the denial or rejection was based on inaccurate scoring andranking of the application. An applicant that has filed for an appeal may not resubmit theapplication until the Agency issues a decision.


Sec. 1007. APPLICATION INFORMATION REQUIREMENTS(a) A completed application shall include the following documentation, studies, reports and

information in a form satisfactory to the Agency. Applications shall be prepared inconformance with the provisions of this part and applicable USDA regulations, including 7CFR 3015, 3016, and 3019. Applicants shall use the Agency's Application Guide for thisprogram, found at http://www.usda.gov/rus/telecom/.

(b) Completed applications shall include the following:(1) An Application for Federal Assistance. A completed Standard Form 424.(2) An Executive Summary of the Project. The applicant shall provide the Agency with

a summary of the project, including the following:(A) A description of the project, including, where applicable, the number of

subscribers, households, and businesses covered by the project and jobs(expressed in person-hours) directly created to perform the project;

(B) A description of the applicant, including all affiliated entities andunaffiliated partners;

(C) The projected total project cost and an explanation as how that cost wasderived;

(D) An overview of the Broadband System to be developed, including the typesof equipment, technologies, and facilities to be used, and the High SpeedBroadband Service to be advertised and generally available to customers;

(E) A description of the availability of existing Broadband Service in theproposed project area and the methodology used to support the description;and

(F) A demonstration that the proposed project meets the purposes of theProgram, including that at least 75% of the Service Area is a Rural Areawith Insufficient High Speed Broadband to facilitate rural economicdevelopment and that the project will be commenced and completedexpeditiously.

(3) Applicant and Service Area Information. Each applicant shall provide thefollowing information:(A) Contact information, including an e-mail and postal address to be used to

receive official notices from the Agency;(B) Background on the applicant, including operational and financial

information for the previous five (5) years;(C) Evidence of its legal existence and authority to enter into a grant agreement

with the Agency and to perform the activities proposed under the grantapplication, including any certifications from local, state, and federalregulatory authorities;

(D) A description of the applicant's current telecommunications and broadbandinfrastructure;

(E) A description of service areas where the applicant currently providestelecommunications, broadband, wireless, video, or satellite service; and

(F) A description of other broadband facilities and services currently beingprovided in the service area of a proposed project and thus whether such


area is at least 75% rural with Insufficient High Speed Broadband Serviceand is unserved.

(4) Statement of experience. The applicant shall provide a written narrative describingits demonstrated capability and experience, if any, that will enable it to achieve theobjectives of and implementing the activities in the project in an efficient, reliable,and sustainable fashion.

(5)

Project design and costs. The applicant shall submit a design of the project thatcontains at a minimum the following:(A) A brief narrative discussing the proposed project;(B) The services to be provided by the project and the technology used to

provide those services;(C) The number of customers to be served by the project, the service area, and

the average density of the households in the service area (expressed ashouseholds per square mile);

(D) Project budget, including any expenditures that total more than $10,000("significant expenditures");

(E) All existing and proposed facilities, services, or both that are part of theproj ect;

(F) Engineering design studies providing an economical and practicalengineering design of the project, including a detailed description of thefacilities to be funded, technical specifications, data rates, and costs;

(G) If applicable, equipment suppliers, construction and installation firms, andother entities that the applicant has pre-selected to be used on the project,along with the background on the entity and its specific role in the project;

(H) An estimated price for services provided to customers using facilitiessupported by the project and, to the maximum extent practicable, theaverage price within the state for comparable Broadband Service (providedon a cost per megabit basis); and

(I) A map of the proposed Service Area reflecting the proposed location of anykey facilities.

(6)

Scope of work. The scope of work shall include, at a minimum:(A) The specific activities and services to be performed under the project;(B) A description specifically identifying the entities and individuals who will

carry out the activities and services and their relevant qualifications andexperience;

(C) The time-frames for accomplishing the project objectives and activities,including the project start and end dates; and

(D) A budget for all capital, operational, and administrative expendituresreflecting the line item costs for Eligible Grant Purposes in Sec. 1005 andother sources of funds necessary to complete the project.

(7)

Scoring criteria documentation. Each grant applicant shall address and providedocumentation on how it meets each of the scoring criteria detailed in Sec. 1008,except for areas scored by the Agency in its discretion.


(8)

Financial information. The applicant shall provide a narrative description andsupporting evidence demonstrating the availability of funding to complete theproject within two (2) years of the date of the award, sufficiency of resources andexpertise necessary to undertake and complete the project, and, for infrastructureprojects, demonstrating the sustainability of the project during building out and fortwo (2) years after completion. At minimum, the following financial informationis required:(A) All projected expenses, including all sources of funding (both public and

private) for the project;(B) A demonstration that it satisfies the Matching Funds requirement unless a

waiver is filed;(C) If requested by the agency as a result of a Matching Funds waiver,

performance bond documentation;(D) Certified financial statements, if available; otherwise, the most current

income statement and balance sheet for existing operations; and(E) Pro-forma financial information for five (5) years, evidencing the

sustainability of the project; and(F) A description of other broadband facilities and services currently being

provided in the service area of a proposed project and thus whether sucharea has insufficient High Speed Broadband Service or is unserved.

(9)

Support from other entities. The applicant shall describe any support for theproject from any state or local government, health, educational, or socialinstitutions, or any public safety entities in the project service area.

(10) Compliance with other federal statutes. The applicant must provide certificationthat it is in compliance with other federal statutes and regulations, including, butnot limited to the following:(A) 7 CFR part 15, subpart A - Nondiscrimination in Federally Assisted

Programs of the Department of Agriculture - Effectuation of Title VI of theCivil Rights Act of 1964.

(B) 7 CFR part 3015 - Uniform Federal Assistance Regulations.(C) 7 CFR part 3017 - Government-wide Debarment and Suspension (Non-

procurement).(D) 7 CFR part 3018 - New Restrictions on Lobbying.(E) 7 CFR part 3021- Government-wide Requirements for Drug-Free

Workplace (Financial Assistance).(F) Certification Regarding Architectural Barriers.(G) Certification Regarding Flood Hazard Precautions.(H) An environmental report, in accordance with 7 CFR 1794.(I) Federal Obligation Certification on Delinquent Debt.


Sec. 1008. SCORING OF APPLICATIONS TO DETERMINE AWARDS

The following formulas shall be used to score an application. All eligible applications shallreceive points (Maximum 100 points) pursuant to the following scoring criteria:

SCORING CRITERIA DEFINED(a) Jobs Creation (up to 20 points). The number of jobs directly created by the project,

including for construction, support, and management. The points awarded shall bedetermined by the following formula:

Jobs Points = (j 1 / tcl) / (Max(j / tc)) * 20

j = Direct jobs proposed to be created by the project (expressed in person-hours of work to be expended by all individuals directly working on theproject)tc = Total cost of project(1) "ji / tci" is the ratio "j / tc" for the specific project being scored;(2) "Max(j / tc)" is the highest ratio "j / tc" of any project submitted by

an applicant during the current filing window.(b)

Project Feasibility, Initiation, and Completion (up to 20 points). The Agency shall notconsider whether the applicant has requested or receives a waiver of the Matching Fundsrequirement in making any of these scoring determinations. The Agency shall notpreclude or otherwise discriminate against applications where project design, construction,and installation are engaged in simultaneously, that is, "design-build" projects.(1)

Feasibility (up to 10 points). This criterion measures the project's overall chancesfor successful completion. Among the factors to be considered are:

(1) The experience of the applicant;(2) The ability of the applicant to obtain the necessary labor and

materials at the price specified in the application;(3) Use of proven technologies; and(4) Existence of legal barriers.

(2)

Initiation and Completion (up to 10 points). This criterion measures the number ofmonths the applicant has proposed to take to complete the project in light of thetotal cost of the project. Points shall be determined based on the followingformula:

Timeliness Points = (Min (d / tc) / (di / tcl)) * 10

(1) Where "d" is the number of months between the date of the grant awardand the proposed date of completion of the specific project being scored.(2) Where "tc" is the total cost of the proposed project.(3) Where Min (d / tc) is the smallest ratio for any project submitted of theproposed number of months to complete the project divided by the totalcost.


19


(4) The Agency has the discretion to alter "d" for projects in areas whereconstruction is infeasible because of inherent weather conditions, e.g. statesin very cold climates. In such instances, the Agency may alter "d" bydelaying the initiation date of the project from the date of the grant award tothe date when weather permits construction to be undertaken and may "stopthe clock" if the project is to continue through subsequent periods whenconstruction is infeasible.

(c)

Project Scope and Cost (up to 10 points)This shall be determined based on the number of customers the applicant will be able toserve using its Broadband System divided by the funding amount requested from theAgency. Points will be determined based on the following formula:

FRPPC Points Total = FRPPC Pointsr„ral + FRPPC Points „on_rural

Rural Areas:

FRPPC Pointsrural =((Min(a) / ai) * (Min(d) / dl)) * (% of Total Service Arearural) * 10

Non-Rural Areas:

FRPPC Pointsnon-rural =

(Min(a) / ai) * (% of Total Service Arean on,ural) * 10

a = Funds Requested / Potential Customers; "d" is the average number ofhomes per square mile in the proposed service territory.(1) "al" is the "a" for the specific project being scored;(2) "Min(a)" is the lowest "a" value of any project submitted by an

applicant during the current filing window;(3) "dl" is the "d" for the specific project being scored;(4) "Min(d)" is the lowest "d" for any project submitted by an applicant

during the current filing window.(d)

Infrastructure Capabilities and Long-Term Sustainability (up to 20 points)(1) Broadband Transmission Speed (15 points). Each application is required to

provide High Speed Broadband Service - at least 25 Mbps downstream and 5 Mbpsupstream. 10 additional points will be awarded if the applicant constructs aBroadband System that makes generally available to all customers in the ServiceArea increased transmission speeds of at least 50 Mbps downstream and 20 Mbpsupstream from each customer to the internet access node.

(2) Long-Term Sustainability (up to 5 points). The Agency shall award up to 5 pointsbased on its assessment of the applicant's competence and experience inestablishing and operating long-term viable projects and the proposed project'slikelihood of sustainability.


(e) Affordability (5 points). 5 points shall be awarded to an applicant that commits to chargeeach customer served over the infrastructure constructed as part of a grant a price/Mbps forBroadband Service equal to or less than the average price/Mbps for such broadbandtransmission service in the state for a period of at least two (2) years after service to acustomer is initiated.

(f) Competition or Serving Area Preference (10 points). An applicant giving end-users achoice of internet service providers shall be awarded 10 points. An applicant serving anunserved area shall be awarded 10 points.

(g) Rural Utilities Service Borrower's Preference (10 points). A current or past borrowerfrom the Rural Utilities Service shall be awarded 10 points.

(h) Community institution connectivity and community institution support (up to 5 points).This criterion shall be used to score applications based on the degree of connectivity toCommunity Anchor Institutions and the degree of support from such institutions.Applicants shall receive up to 5 points, in the discretion of the Agency, for demonstratingthat it has connected a substantial number of these institutions and received support fromthem for the project.


Sec. 1009. GRANT DOCUMENTATION AND DISTRIBUTION OF FUNDS(a)

The terms and conditions of grants shall be set forth in grant documents prepared by theAgency. The documents shall require the applicant, including any affiliated entities orpartners in the project, to own or control all equipment and facilities financed by the grant.Among other matters, the Agency may prescribe any conditions it deems warranted inadvancing funds, including any terms and conditions applicable to the construction andoperation of the project.


22


Sec. 1010. POST-AWARD REPORTING, COMPLIANCE, MODIFICATION, ANDPENALTIES

(a) REPORTING(1) Frequency of Reports. Every grantee shall report quarterly on the grantee's use of

the assistance and its progress in fulfilling the objectives for which such grant fundswere provided. The first report will be due ninety (90) calendar days from the dateof the award of the grant, and an updated report will be due every ninety ( 90)calendar days thereafter.

(2) Content of Reports. Every report submitted to the Agency shall include:(A) A comparison of the actual accomplishments to the objectives established

for that period in either the application or a previously filed report.(B) A description of any problems, delays, or adverse conditions which have

occurred, or are anticipated, and which may or will affect the attainment ofoverall project objectives, prevent the meeting of time schedules orobjectives, or preclude the attainment of particular project work elementsduring the established time periods. This disclosure shall be accompaniedby a statement of the action taken or planned to resolve or ameliorate thesituation.

(C) A list of significant expenditures made during the most recent reportingperiod. The list should be specific enough to allow the Agency todetermine how the money was spent.

(D) Objectives and timetable established for the next reporting period.(b) COMPLIANCE REQUIREMENTS

Audit Requirements. Each grantee shall have a yearly audit conducted by a licensed andindependent Certified Public Accounting firm ("CPA").(1) The audit standards to be applied to Program awards are the "Government Auditing

Standards" ("GAS") issued by the issued by the Comptroller General of the UnitedStates. In the interest of efficiency, the grantees are required to retain their ownindependent CPA to perform these audits. The Department of Commerce's Officeof Inspector General ("OIG") reserves the right to conduct audits as deemednecessary and appropriate.

(2) Each grantee must establish an annual "as of audit date within twelve months ofthe date of receipt of the first advance of funds from grants approved by theAgency and shall prepare financial statements as of the date established.

(3) The grantee will not limit the scope of the audit to the extent that the CPA is unableto provide an unqualified opinion that the financial statements are presented fairlyin conformity with GAAP.(A) If the CPA determines during the audit that an unqualified opinion cannot

be issued due to a scope limitation imposed by the grantee, the CPA shoulduse professional judgment to determine what levels of the grantee'smanagement should be informed.

(B) After informing the grantee 's management, if the scope limitation is notadequately resolved, the CPA should immediately contact the Agency. TheAgency will endeavor to resolve the matter with the grantee.


23


(4) Until the grantee's approved project is completed, the grantee shall furnish threecopies of the auditor's report, report on compliance and on internal control overfinancial reporting, and management letter to Agency within one hundred-twenty(120) calendar days of the as of audit date.

(5) A grantee that qualifies as a unit of state or local government or Indian tribe as suchterms are defined in the Single Audit Act of 1984 (31 U.S.C. 7501 et seq. ), theSingle Audit Act Amendments of 1996 (31 U.S.C. 7505 et seq.) and OMB CircularA-133, Audits of States, Local Governments, and Non-Profit Organizations (copyavailable from the Executive Office of the President, Publication Services, 725 17thSt., NW., Suite 2200, Washington, DC 20502; 202-395-7332), must comply withthis part as follows:(A) A grantee that expends $300,000 or more in a year in federal awards shall

have an audit performed and submit an auditor's report meeting therequirements of the Single Audit Act of 1984 and the Single Audit ActAmendments of 1996.

(B) A grantee that expends less than $300,000 in federal awards during the yearshall have an audit performed in accordance with the requirements of thispart.

(C) A grantee shall notify the Agency, in writing, within thirty (30) calendardays of the as of audit date, of the total federal awards expended during theyear and shall state whether it will have an audit performed in accordancewith the Single Audit Act of 1984 and the Single Audit Act Amendments of1996, or this part. If an audit is performed in accordance with the SingleAudit Act of 1984 and the Single Audit Act Amendments of 1996, anauditor's report that meets the requirements of the Single Audit Act of 1984,and the Single Audit Act Amendments of 1996, will be sufficient to satisfythat borrower's obligations under this part.

(D) Pursuant to the terms of the audit agreement, the CPA shall make all audit-related documents, including auditors' reports, work-papers, andmanagement letters available to the Agency, or its designatedrepresentative, upon request and must permit Agency, or its designatedrepresentative, to photocopy all audit-related documents.

(c) CERTIFICATION(1)

Every twelve (12) months following grantee's recipient of the funds provided underthe Program, a grantee shall submit to the Agency a certification that it hascomplied with the terms of its grant. At a minimum, the certification shall be madeby an officer of the entity receiving the grant and certify that:(A) It has complied with the non-discrimination and interconnection

requirements of subsection (b)(1) of this section.(B) It has obtained an audit from a independent auditor and that a full and

complete copy of that audit is attached to the certification being submitted.(C) The grantee has only used funds received from the Program for permissible

purposes.


(D)

The grantee does not anticipate deviating from either the terms of its grantor the rules governing the use of the fund in the following year.

(d) MODIFICATIONS TO PROJECT(1)

Project Modifications Require Agency Approval. A grantee may not make anymaterial modifications to the project without receiving Agency approval prior tocommitting to such modifications. Material modifications include:(A) Modification of the proposed service area by more than a de minimis

amount.(B) Modifications that would result in a reduction of the speed of the

Broadband Service to be provided by the project by more than 5%.(C) Modification of the technology used to provide services.(D) Modifications that would reduce the number of customers that would have

access to services offered by the project by more than 5%.(E) An extension in the completion date for the project by more than fourteen

(14) days.(F) A projected or actual increase of 5% or more of any of the projected

expenses in any of the following categories:(1) Capital expenses (e.g., equipment, facilities, real estate);(2) Labor expenses (e.g., wages, contractor related expenses);(3) Operational expenses (e.g., interconnection facilities, electricity).

(2)

Modifications for Good Cause. Any grantee may request for good cause a materialmodification of the terms of the project for which a grant was received bysubmitting the modification to the Agency along with:(A) A brief narrative explaining the nature and necessity of the modification;(B) If applicable, a description of how the services to be provided by the project

or the technology used to provide those services will be modified;(C) The number of affected potential customers;(D) The effect on the proposed project budget and, if necessary, a new budget;(E) Any new engineering or system design studies supporting the modification;(F) Any modification of the estimated price for services provided to customers

using facilities supported by the project;(G) If applicable, a map of the modified proposed service area reflecting the

proposed location of any key facilities or expense items; and(H) If applicable, a new time-frame for accomplishing the project objectives and

activities, including a list of objectives to be accomplished in the nextninety (90) calendar days.

(3)

Criteria for modifications. Modifications shall be granted upon a showing that therequested modifications:(A) Comply with the purposes of the Program and the application submitted by

the grantee;


(B) Do not significantly diminish the ability of the grantee substantially toachieve the objectives included in the application; and

(C) Do not constitute or result from waste, poor management, or deception ofthe Agency in the grantee's application.

(4)

Timing. The Agency shall issue a decision on a requested modification withinthirty (30) calendar days of its submission, except that if a grantee, within thereasonable discretion of the Agency, demonstrates a need for immediate action, theAgency will issue its decision within ten (10) calendar days.

(e) INVESTIGATIONS FOR NON-COMPLIANCE AND ASSESSMENT OF PENALTIES(1) Notification. The Agency may at any time issue a letter of inquiry to the grantee.(2) Opportunity to Respond and Agency Determination. A grantee receiving a letter of

inquiry shall respond within fourteen (14) calendar days. Upon receiving aresponse, the Agency shall determine whether an investigation into any allegationsof wrongdoing is warranted.

(3) Agency Investigation. In conducting an investigation, the Agency may require thegrantee to provide any and all documentation relating to the grant. The Agencymay conduct interviews with officers and employees of the grantee.

(4) Opportunity to Cure. A grantee subject to an investigation for non-willful breachesof the terms of its grant shall be given an opportunity to cure the breach by takingremedial steps set forth by the Agency.

(5) Penalties for non-compliance or breach. The Agency may revoke a grant andrequire forfeiture of a performance bond if a grantee fails to cooperate with anAgency investigation or if the Agency determines that the grantee willfullybreached the terms of its grant. The Agency may impose fines for non-willfulbreaches that are not cured in a timely fashion.


ECONOMIC EFFECTS OF TAX INCENTIVES FOR BROADBANDINFRASTRUCTURE DEPLOYMENT

JEFFREY A. EISENACHHAL J. SINGER

JEFFREY D. WEST

EMPIRIS, LLC

PREPARED ON BEHALF OF THE FIBER-TO-THE-HOME COUNCIL

JANUARY 5, 2009

ECONOMIC EFFECTS OF TAX INCENTIVES FOR BROADBAND

INFRASTRUCTURE DEPLOYMENT

EXECUTIVE SUMMARY

Investments in next generation broadband infrastructure, such as fiber to the home networks,generate both immediate and long-term benefits for the U.S. economy. In the short run, increasedcapital investment leads directly to increased employment and output. In the longer run, therapid deployment of affordable broadband services transmitted over next generationinfrastructure is essential to U.S. competitiveness. Tax incentives to encourage deployment ofthese high-speed broadband services therefore represent an efficient mechanism for increasingboth short-term economic growth and long-run economic competitiveness.

We analyzed four proposals: (1) 100 percent expensing of investments made in next generationbroadband networks - defined as those networks capable of delivering at least 100 megabitsdownstream and 20 megabits upstream; (2) 50 percent expensing of broadband investments inrural and underserved areas capable of delivering at least 5 megabits downstream and 1 megabitupstream; (3) tax-credit bonds for private investments in next generation broadbandinfrastructure; and (4) tax-credit bonds for public sector investments in next generationbroadband infrastructure.

Our results demonstrate that each of these proposals would generate substantial net benefits forthe U.S. economy. Specifically:

• The two tax credit bond proposals would have the largest impact on the economy, generatingmore than $30 billion in new investment in next generation broadband infrastructure andmore than $100 billion in additional GDP over the next three, and directly creatingapproximately 215,000 net new jobs in each of the next three years.

• The expensing proposals - which are far less "expensive" in terms of forgone tax revenues -would also have significant effects on investment, growth and employment, generating up to$6 billion in new investment and over $18 billion in increased GDP over the next three,and directly creating approximately 37,000 net new jobs in each of the next three.

• All of the proposals represent efficient mechanisms for stimulating economic activity andemployment. Even ignoring the offsetting tax revenues that would result from increasedemployment and economic activity, and counting only direct employment effects, the taxexpenditure per new job created is between $50,000 and $57,000 for the three proposalsinvolving next generation networks, and approximately $71,000 for the rural/underservedproposal.

• The proposals would significantly increase next generation broadband availability overalland current generation availability in rural and underserved areas, reduce broadband prices

(as measured by price per megabit), increase broadband penetration, and thus result insubstantial indirect effects on productivity, growth and employment. Under the two

expensing proposals, for example, up to 6.6 million additional homes would be passed by

fiber to the home type networks, and broadband service would become available to 4.0million homes in rural and underserved areas that do not have broadband access.

• Increased broadband penetration resulting from lower prices and increased availability wouldresult in additional "indirect" job creation. For example, the two tax-credit bond proposalswould result in a sustained increase in employment of nearly 360,000 new jobs.

Finally, it should be noted that these proposals, if adopted, would affect economic activity almostimmediately. Private sector firms are already in the field deploying new broadband infrastructureand have the ability to further accelerate planned deployments. The temporary nature of the fourproposals analyzed here would give these firms very strong incentives to "front-load" investmentactivities that might otherwise be stretched out over the course of many years (especially in viewof the current downturn in economic activity).

The results of our analysis are summarized in Table 1, which is reproduced below.

TABLE 1: SUMMARY OF ANNUAL DIRECT ECONOMIC EFFECTS ON JOBS AND OUTPUT, 2009-2011Private

100% Expensingfor 100/20 Mbps

50% Expensing for511 Mbps

(Rural/UnderservedAreas only)

SectorTax

CreditBonds

PublicSector Tax

CreditBonds

Direct Effects-

Output ($Billion, 2009-2011 total) 5.214 - 15.334 1.051 - 3.091 93.878 9.388-

Jobs (Annual Increase) 10,965 - 32,250 1,840 - 5,413 197,437 19,744Forgone Tax Revenues over Investment

0.583 - 1.715 0.131 - 0.386 11.178 0.985Life ($Billion)$ Forgone Tax Revenue per Direct $53 182 $71 229 $56,616 $49 889Effect JobDirect Jobs per $Million Forgone Tax

,

18.804

,

14 .039 17.663

,

20.045Revenue

ii

CONTENTS

1.

II.

III.

Introduction ....................................................................................................................... 1

The Impact of Tax Incentives on Investment and the Economy .................................. 2

Proposals Analyzed ........................................................................................................... 2

A.

B.

C.

Expensing Proposals ............................................................................................... 2

Private Sector Tax-Credit Bond Proposal ............................................................... 3

Public Sector Tax-Credit Bond Proposal ................................................................ 3

IV. Analysis of Direct Effects ................................................................................................. 4

A. Description

of Data .................................................................................................

4

B. Direct Effects of 100/20 Mbps Expensing (100 percent) ..................................... 11

C. Direct Effects of 5/1 Mbps Expensing (50 percent) ............................................. 11

D. Direct Effects of Private Sector Tax-Credit Bonds .............................................. 12

E. Direct Effects of Public Sector Tax-Credit Bonds ................................................ 12

V.

Impact on Tax Revenues ................................................................................................13

VI.

Analysis of Indirect Effects ............................................................................................ 15

A. Methodology and Assumptions ............................................................................ 16

B. Results of Indirect Effects Analysis ...................................................................... 18

VII.

Conclusion ....................................................................................................................... 18

I. INTRODUCTION

1. We have been asked by the Fiber-to-the-Home Council (FTTH Council) toanalyze the economic impact of proposed tax incentives for broadband deployment. We analyzefour specific proposals:

A) Immediate expensing of 100 percent of investments providing 100 megabitdownstream/20 megabit upstream service to any area in the United States forthree years (2009-2011),

B) Immediate expensing of 50 percent of investments providing 5 megabitdownstream/l megabit upstream service to rural and underserved areas in theUnited States for three years (2009-2011),

C) Issuance by private sector entities of up to $10 billion in tax-credit bonds per yearover the next three years (2009-2011) to fund investments on broadbanddeployments providing 100 megabit downstream/20 megabit upstream service toany area in the United States; and

D) Issuance by public sector entities of up to $1 billion in tax-credit bonds per yearover the next three years (2009-2011) to fund investments on broadbanddeployments providing 100 megabit downstream/20 megabit upstream service toany area in the United States.

2. Each of these proposals will generate significant benefits for the U.S. economy,measured both in increased GDP and increased employment. GDP and employment will increaseover the next three years because of the increased investments by broadband providers resultingfrom the tax relief ("direct effect"). Table 1 shows the economic impact of each of the fourproposals.

TABLE 1: SUMMARY OF DIRECT ECONOMIC EFFECTS ON JOBS AND OUTPUT, 2009-2011


50% Expensing for5/1 Mbps


PrivateSectorTax

CreditBonds

PublicSector Tax

CreditBonds

Direct Effects-

Output ($Billion, 2009-2011 total) 5.214 - 15.334 1.051 - 3.091 93.878 9.388-

Jobs (Annual Increase) 10,965 - 32,250 1,840 - 5,413 197,437 19,744Forgone Tax Revenues over Investment

0.583 - 1.715 0.131 - 0.386 11.178 0.985Lite ($Billion)$ Forgone Tax Revenue per Direct

$53 182 '371229 $56 616 4-49 889Effect Job 9 9 5 'Direct Jobs per $Million Forgone Tax 18.804 14.039 17.663 20.045Revenue

3. As Table 1 shows, the impact on economic output from 2009 to 2011 ranges from$1.051 billion for the 50 percent expensing proposal to $93.878 billion for the private sector tax-credit bonds. The increase in average annual employment ranges from 1,840 net new jobs for the50 percent expensing proposal to 197,437 net new jobs for the private sector tax-credit bondproposal.

4. Table 1 also shows the forgone tax revenues from each proposal. Our estimates offorgone tax revenues represent only the direct effect of each policy, and do not account foroffsetting revenues resulting from increased incomes for suppliers of the inputs for broadbanddeployment (e.g., income taxes resulting from increased employment). Our estimates of theforgone tax revenues over the 15-year depreciable life of the investments made from 2009 to2011 range from $131 million to $11.2 billion for each of the four proposals. Thus, from 2009 to2011, each of the four proposals will sustain an average of between 14 and 20 net new jobs permillion dollars of forgone tax revenue as a result of the direct effect of increased broadbandcapital expenditures.

II. THE IMPACT OF TAX INCENTIVES ON INVESTMENT AND THE ECONOMY

5. Investment tax incentives affect the economy by reducing the after-tax cost ofinvestment and thus increasing the effective rate of return on investment (ROT) from what itwould be in the absence of the tax incentive. As a result, firms choose to make investments thatwould otherwise be uneconomic, and the overall amount of investment in the economy increasesaccordingly.

6. By increasing investment, investment tax incentives have a direct effect onemployment and output. The direct effects are jobs and economic activity created as a directresult of increased outlays for equipment, increased employment for installation, and associatedexpenses (e.g., jobs resulting from increased purchases of equipment needed for installation,such as bucket trucks and construction equipment). The most authoritative and generallyaccepted means of estimating the direct effect of increased investment is the RIMS II model,developed by the Bureau of Economic Analysis.

III. PROPOSALS ANALYZED

7. We analyzed four specific proposals. In this section, we briefly describe each.

A.

Expensing Proposals

8. Expensing (or accelerated depreciation) affects the after-tax cost of investment byallowing a firm to deduct from its taxable earnings the full amount spent on the investment,rather than stretching that deduction out based on the depreciation schedule for that investment.The after-tax cost of the investment is thus reduced by the difference between the value of thetax deduction taken in year one, on the one hand, and the present value of the flow of taxdeductions that would otherwise be taken over the life of the equipment. The impact of

2

expensing thus depends on the depreciation life (for tax purposes) of the eligible investment, andon the applicable tax rate.

9. 100/20 Mbps: The specific expensing proposal we were asked to analyze wouldallow for immediate expensing of 100 percent of investments made over three years (2009-2011)that provide 100 megabit downstream/20 megabit upstream service to any area in the UnitedStates.

10. 5/1 Mbps Rural & Underserved: The second specific expensing proposal wewere asked to analyze would allow for immediate expensing of 50 percent of investments madeover three years (2009-2011) that provide 5 megabit downstream/1 megabit upstream service torural and underserved areas of the United States.

B.

Private Sector Tax-Credit Bond Proposal

11. Tax-credit bonds are debt instruments that qualify bondholders to receive taxcredits from the U.S. Treasury, effectively reducing the bondholders' tax liability by an amountequal to the tax credit. As a result, the yield required to sell such bonds at par is reduced by thevalue of the tax credit to the bonds' purchasers.

12. The tax-credit bond proposals we were asked to analyze call for the Secretary ofthe Treasury to establish tax credits which allow issuers to sell the bonds at a zero coupon rate.Thus, bondholders would receive tax credits equal to the amount they would have received ininterest had the bonds been sold without the tax credit. Under this proposal, private sectorentities would be able to borrow up to $10 billion in tax-credit bonds per year over the next threeyears (2009-2011) to fund investments on broadband deployments providing 100 megabitdownstream/20 megabit upstream service to any area in the United States.

C.

Public Sector Tax-Credit Bond Proposal

13. Our analysis of the public sector tax-credit bond proposal is similar to the analysisof the private sector tax-credit bond proposal. The public sector proposal would allow for publicsector entities to partner with private sector entities in the deployment of broadband. This accessto lower-cost funding would induce a firm to invest more in broadband deployments than itwould absent the tax incentive.

14. The specific tax-credit bond proposal we were asked to analyze would allow forthe issuance by public sector entities of up to $1 billion in tax-credit bonds per year over the nextthree years (2009-2011) to fund investments on broadband deployments providing 100 megabit

downstream/20 megabit upstream service to any area in the United States. The FTTH Councilbelieves that providing $1 billion per year in bonds is appropriate for this program, as comparedto the larger $10 billion in bonds for the private sector program described above, because to datepublic sector entities have been involved more selectively in deploying broadband infrastructureand because, at least for municipalities, they are limited in the scale of their deployments by the

3

geographic limitations of their jurisdictions. In addition, public sector entities typically takesubstantially longer to deploy broadband networks than private sector entities - in some recentcases, approximately three years from proposal to groundbreaking.

IV. ANALYSIS OF DIRECT EFFECTS

15. Our analysis of each proposal entailed estimating the direct effects of increasedspending resulting from the tax incentives. All of our models include various baselineassumptions related to the number of homes passed and served by broadband technology and theinvestment required to deploy and maintain broadband lines. For estimates relating to modelingbroadband service of 100/20 Mbps, we use historical data and projections on fiber-to-the-home(FTTH), the most prevalent form of technology currently used to achieve the speeds required to

meet the tax incentive thresholds. For estimates relating to modeling broadband service of 5/1Mbps, we use historical data and projections on cable and digital subscriber line (DSL)broadband service.

A.

Description of Data

• 100/20 Mbps Service (FTTH)

16. We use historical data and an average of forecasts of homes passed and homesserved by FTTH through 2013 from RVA Market Research (RVA). Dividing RVA's forecasts ofthe number of homes passed and homes served by Morgan Stanley's forecasted number ofhouseholds through 20111 yields annual fiber penetration rates and adoption rates.

17. To estimate the cost to deploy and serve a home with fiber, we use estimates froma proposal for fiber deployments for the city of Portland, Oregon.Z According to the 2007proposal by Uptown Services, capital expenditures per home passed with FTTH were $765 inoutside plant build-out costs. Uptown Services estimated that subscriber capital investments,which would include optical network terminals (ONTs), drop cables, connectors, ONT powersupply, and set top boxes would be between $667 (without digital video recorder (DVR)) and$817 (with DVR) per new subscriber. Therefore, we assume that the investment required to passa home with fiber is $765 and the additional investment required to serve a home is $742(average of $667 and $817) in 2007. After 2007, we assume a 5 percent annual decrease in theinvestments required to pass and serve a home with fiber.

18. Finally, we assume that 100 percent of forecasted fiber capital expenditures wouldmeet the speed limits necessary for eligibility for the tax expensing and tax-credit bond proposals

' Simon Flannery, Benjamin Swinburne, David Gober, Daniel Gaviria, & Chad Harris, Morgan Stanley,Cable/Sat & Telecom Broadband Outlook: Online Usage Growth Favors Cable, DirecTV Remains HD Leader (July18, 2008), at Ex. 26.

2 Uptown Services, LLC, "Phase 2 Business Case for a Community Fiber Network, Prepared for the City ofPortland by Uptown Services, LLC," Nov. 2007, at 25.

4

because RVA's forecasts are based on deployments that can meet the 100/20 Mbps speedthresholds.

• 5/1 Mbps Service (Cable and DSL)

19. To estimate the number of homes passed by 5/1 Mbps service without the taxincentive, we use data from Morgan Stanley's forecast of residential cable and DSL subscribersthrough 2011.3 Morgan Stanley presents forecasts of broadband subscribers by cable andcombined DSL+Fiber service. We estimate DSL subscribers by subtracting the RVA forecasts offiber subscribers from Morgan Stanley's forecast of DSL+Fiber subscribers. Morgan Stanleyforecasts the number of homes passed for cable broadband services, but does not forecast thenumber of homes passed by DSL service.4 We assume that if a home is not passed by cablebroadband, then it is not passed by DSL. Based on Morgan Stanley's forecasts of homes passedby cable broadband and total households, an average of 7.3 million homes (equal to 6.0 percentof all households) will not be passed by broadband from 2009 through 2011 without theproposed tax incentives.

20. To estimate the cost to deploy and serve a rural or underserved home with cable,we use capital expenditure estimates of cable deployment from Morgan Stanley. Both cable andDSL broadband require three types of capital expenditures: (1) deployment capital expenditures,or investment in upgrading networks; (2) expenditures on customer premises equipment (CPE),

such as modems; and, (3) maintenance capital expenditures. Morgan Stanley forecasts capitalexpenditures through 2012 on rebuilds and upgrades of cable networks for advanced services,including broadband, digital cable, and telephony, per basic subscriber, expenditures on CPE pernet additional broadband subscriber, and maintenance capital expenditures on broadband per

existing subscriber.5 Morgan Stanley's average forecasted estimates for cable broadband capital

expenditures between 2009 and 2011 were (1) $100 per new subscriber in CPE, (2) $3 per totalbasic cable subscriber in investments to upgrade service to broadband capability, and (3) $20 inmaintenance investments per cable broadband subscriber. Morgan Stanley's $3 estimate ofcapital expenditures for upgrades is low because it is an average expenditure for all basicsubscribers, not just those who are being upgraded. Using the estimates of basic subscribers andnew homes passed, Morgan Stanley's estimates show that the cost to upgrade service is $213 pernew home passed in 2009. This is the estimate we use for estimating the cost to upgrade cablefor providing broadband service to a rural or underserved customer in 2009, and we assume thatthis cost declines by 5 percent each year.

Simon Flannery, Benjamin Swinburne, David Gober, Daniel Gaviria, & Chad Harris, Morgan Stanley,Cable/Sat & Telecom Broadband Outlook: Online Usage Growth Favors Cable, DirecTV Remains HD Leader (July18, 2008), at Ex. 26.

4

Id. at Ex. 23.' Richard Bilotti, Benjamin Swinburne, & Megan Lynch, Morgan Stanley, Truth, Lies and Truck Rolls:

Understanding Product Profitability 8 (Oct. 4, 2002).

5

21. To estimate the cost to deploy and serve a rural or underserved home with DSL,we use a Bear Stearns report that forecasts DSL deployment and CPE capital expenditures pernew customer and DSL maintenance capital expenditures per existing customer through 2005.6After 2005, we assume that each line-item expenditure in Bear Stearns's capital expenditureforecasts decreases by 10 percent annually.

22. Additionally, Bear Stearns presents capital expenditure forecasts for twocategories of customers: those located within 18,000 feet of a service provider's central officeand those beyond 18,000 feet. The cost to deploy DSL to a customer beyond 18,000 feet ishigher than the cost to deploy DSL to a customer within 18,000 feet. Because the deploymentsunder the proposed expensing legislation would be made to rural and underserved areas, we usethe higher deployment costs from the Bear Stearns report for customers beyond 18,000 feet ofthe service provider's central office when estimating increased capital expenditures in rural andunderserved areas.

23.We estimated capital expenditures on DSL and cable broadband without the taxincentive by multiplying the various components of capital expenditures by the relevant factornew homes passed, gross subscriber additions, or existing subscribers. In calculating grosssubscriber additions, we assume that 75 percent of new fiber subscribers each year are formerDSL subscribers and that 15 percent of new fiber subscribers each year are former cablebroadband subscribers. Thus, the number of gross subscriber additions is equal to MorganStanley's forecasted net subscriber additions plus the number of DSL and cable broadbandsubscribers we assume switched to fiber.

24.

Finally, our analysis required an assumption about the share of cable and DSL

capital expenditures that would be eligible for the proposed tax incentive. We assume that allexpenditures would meet the speed threshold. We assume that 63 percent of the forecasted cable

and DSL capital expenditures would meet the rural and underserved area qualifications for 50percent tax expensing. In earlier work by two of the authors of this study, we estimated the rural-underserved share of homes passed to apply to the total capital expenditures. We assumed thatthis share was equal to the percentage of households served by at least four broadband providersthat reside in zip codes that are rural or underserved. To calculate this figure, we first classifiedzip codes as being rural or underserved if at least 50 percent of the Census tracts intersecting the

G Robert Fagin, Bear Stearns, Wireline Services: The DSL Report: Demystifying the Economics of DigitalSubscriber Line, Exhibit 6 (Sept. 2002). Our estimates differ from Bear Stearns in that we calculate maintenancecapital expenditures per existing DSL subscriber in a year to be equal to 15 percent of the sum of deploymentequipment, incremental bandwidth, and ATM switching capacity capital expenditures per newly deployed DSLcustomer in that year. This estimate of maintenance capital expenditures produces results that more closely matchthe DSL maintenance capital expenditures per line estimated by other analysts. See, e.g., Douglas S. Shapiro, Bancof America Securities, Broadband Brief. DSL Economics, Game Theory and What Happens to Broadband PricingNext 4 (Sept. 8, 2003). Banc of America estimates annual DSL maintenance capital expenditures per subscriber to

be $46 in 2003 and $36 in 2008. Using our methodology and Bear Steams's estimates of deployment capitalexpenditures, we estimate annual DSL maintenance capital expenditures per existing subscriber to be $42 in 2009.

6

boundaries of the zip code are classified as rural or underserved according to the definitions usedin previous legislation that is consistent with the current proposal. We then matched these zipcodes with June 2000 and June 2002 data from the FCC that shows the number of firmsproviding broadband service by zip code. We estimated that 18 percent of the households in zipcodes that were served by at least four high-speed service providers were in rural or underservedzip codes in June 2000. We calculated that this share grew to 28 percent in June 2002-a 10-percentage-point increase over two years. Based on this increase, we assume that the sharecontinued to increase by 5 percentage points each year. Therefore, we assume that, absent the taxincentive, 63 percent of capital expenditures on current generation technology in 2009 will bespent on deployments in rural and underserved areas, 68 percent will go to rural and underservedareas in 2010, and so forth. When capital expenditures increase as a result of the tax incentive,we assume that 100 percent of the additional DSL and cable customers and homes passedresulting from the tax incentive would be located in rural and underserved areas.

• Multipliers

25.

The incremental residential broadband capital expenditures that result from these

policies will have a multiplicative effect on the economy when the economy is at less than fullemployment, as it is today.' To estimate this multiplicative effect, we use the most recent RIMSII multipliers on detailed industries by NAICS code, based on 1997 national benchmark input-output data and 2006 regional data. Broadband deployment requires capital spending onequipment and construction. Therefore, we use multipliers for telephone apparatusmanufacturing, fiber optic cable manufacturing, and construction. Table 2 shows the industrymultipliers we use and the weights assigned to each industry to estimate the average multiplierfor broadband investment.8

The multiplier is a standard principle in the macroeconomics literature. See, e.g., RUDIGER DORNBUSCH &STANLEY FISCHER, MACROECONOMICS 66 (McGraw Hill 6th ed. 1994). Richard Kahn first introduced the multiplier

concept as an "employment multiplier." See Richard F. Kahn, The Relation of Home Investment To Employment, 41ECON. J. 173, 173-98 (1931). John Maynard Keynes expanded upon this concept by introducing the "investmentmultiplier," which is the multiplier used in our analysis. See John Maynard Keynes, A GENERAL THEORY OFEMPLOYMENT, INTEREST, AND MONEY 115 (Harcourt Brace & Co. 1964) (1936).

8 U.S. Department of Commerce, Bureau of Economic Analysis, Regional Input-Output Modeling System(RIMS II), Table 1.5 (2008). Multipliers are based on the 1997 Benchmark Input-Output Table for the Nation and2006 regional data. These industries approximately match the expenditures made to deploy and connect broadband

more closely than any other multiplier category. According to the 1997 NAICS definition, industry 334210(Telephone apparatus manufacturing) consists of "[e]stablishments primarily engaged in manufacturing wiretelephone and data communications equipment. These products may be standalone or board-level components of alarger system. Examples of products made by these establishments are central office switching equipment, cordlesstelephones (except cellular), PBX equipment, telephones, telephone answering machines, and data communicationsequipment, such as bridges, routers, and gateways." Industry 335921 (Fiber optic cable manufacturing) consists of"[e]stablishments primarily engaged in manufacturing insulated fiber-optic cable from purchased fiber-optic strand."Industry 230000 (Construction) includes, among other types of construction establishments, "[e]stablishmentsprimarily responsible for the entire construction (i.e., new work, reconstruction, or repairs) of electric power andcommunication transmission lines and towers, radio and television transmitting/receiving towers, cable laying, and

7

TABLE 2: MULTIPLIERS FOR BROADBAND CAPITAL EXPENDITURES

AICS Industry

FinalDemand:Output

(GDP $ perInvested)

FinalDemand:

Employment(Jobs perMillion $Invested)

TTHIndustryWeight

ableIndustryWeight

SLIndustryWeight

irelessIndustryWeight

334210 Telephone apparatus 2 6424 11 7592 30% 80% 80%manufacturing334220 Broadcast and wireless

.

2,8309

.

13.7828 0% 0% 0% 93%communications equipment

335921 Fiber optic cable manufacturing 3.0284 14.4066 20% 0% 0%

230000 Construction 3.4617 26.6692 50% 20% 20% 7%

FTTH Weighted Average Multiplier 3.1293 19.7437Cable Weighted Average Multiplier 2.8063 14.7412DSL Weighted Average Multiplier 2.8063 14.7412Wireless Weighted Average Multiplier 2.8739 14.6618

26. According to Uptown Services, a majority (54 percent) of capital spendingrequired in outside plant build-out for FTTH is spent on construction.9 This heavy reliance onconstruction for FTTH is due in large part to the burying of new infrastructure in the ground.Construction is given a larger weight for FTTH than for DSL, cable or wireless because much ofthe infrastructure over which cable (e.g., conduits and HFC cable), DSL (i.e., copper), andwireless (i.e., towers) already exists and does not require new construction. As Table 2 shows,the multipliers for the construction industry are substantially larger than the multipliers for theother three industries. For example, $1 million of investment in FTTH deployment will result inalmost 20 jobs, whereas a dollar of investment in wireless broadband will result in fewer than 15

jobs.10 This is largely due to our estimate that only 7 percent of wireless broadband capitalexpenditures go to the construction industry.I I

cable television lines; (2) establishments identified as power and communication transmission line constructionmanagement firms; and (3) establishments identified as special trade contractors engaged in activities primarilyrelated to power- and communication transmission line construction." Industry 334220 (Broadcast and wirelesscommunications equipment) includes "establishments primarily engaged in manufacturing radio and televisionbroadcast and wireless communications equipment. Examples of products made by these establishments are:transmitting and receiving antennas, cable television equipment, GPS equipment, pagers, cellular phones, mobilecommunications equipment, and radio and television studio and broadcasting equipment." See U.S. Census Bureau,1997 NAICS and 1987 SIC Correspondence Tables, available at http://www.census.gov/epcd/www/naicstab.htm.

9 Uptown Services, LLC, "Phase 2 Business Case for a Community Fiber Network, Prepared for the City ofPortland by Uptown Services, LLC," Nov. 2007, at 25.

10 The employment multipliers in Table 2 represent the effect of investments on jobs within the United States.As Table 2 shows, the employment multiplier for the construction industry is approximately twice as large as themultipliers for the other industries. This difference is due in large part to the concentration of construction jobs

8

27. The multiplier specific to the industries shown in Table 2 translates the effect ofbroadband capital spending on U.S. employment and gross domestic product (GDP). Themultiplicative effect occurs because higher expenditures on broadband deployment-equivalentto higher demand for construction and the products of equipment manufacturers-causes theequipment manufacturers and construction firms to hire more employees to meet the increaseddemand. The equipment manufacturers' incomes and construction firms' incomes increase as

well due to the increased expenditures, which, according to the consumption function, willincrease their consumption as well. The increased consumption of equipment manufacturers andconstruction firms will in turn increase the income and employment of their suppliers. Theincome and employment of those suppliers will then increase, and so on.

28.

Table 2 shows that a one -million dollar increase in the final demand for

communications infrastructure investment by fiber broadband providers would create nearly 20new jobs nationally. The timeframe over which employment would increase is debatable. Inmost cases, the BEA considers one year to be the appropriate time horizon for its multipliers tohave achieved full effect. 12 Other economists have estimated that at least two years may berequired for incremental investment to achieve its full impact on the economy. 13 The multipliereffect is most fully realized when there is substantial excess capacity, during economicrecessions or sharp declines in specific sectors. Because the economy is in the midst of arecession, 14 excess capacity exists. Accordingly, our estimates of the multiplier effect ofincreased capital expenditures reasonably capture the effect that increased capital spending bybroadband providers would have on the U.S. economy.

within the United States relative to the other industries. For example, a dollar spent on telephone equipment may bespent in a factory overseas, resulting in an increase in foreign employment. Construction, on the other hand, is alocal industry that requires U.S.-based workers to perform its essential functions. Therefore, a dollar spent on theconstruction industry will lead to more U.S. job growth than a dollar spent on other industries in which much of themain output is produced overseas.

i i According to a report by the WiMax Forum, 7 percent of the 5-year capital expenditures on WiMaxdeployment in rural areas (the only areas in which WiMax would be eligible for any of the tax proposals weanalyze) would be spent on "site acquisition and civil works." This component appears to be focused more on theconstruction industry, whereas the other components of capital expenditures in the WiMax report are focused onequipment such as CPE, base station equipment, and base station backhaul. WiMax Forum, Business Case Modelsfor Fixed Broadband Wireless Access based on WiMAX Technology and the 802.16 Standard (Oct. 10, 2004), at 20.

12 U.S. DEPARTMENT OF COMMERCE, BUREAU OF ECONOMIC ANALYSIS, REGIONAL INPUT-OUTPUT MODELING

SYSTEM REGIONAL MULTIPLIERS: A USER HANDBOOK FOR THE REGIONAL INPUT-OUTPUT MODELING SYSTEM

(RIMS II), at 8 (Mar. 1997).

1' See, e.g., OLIVER BLANCHARD, MACROECONOMICS 72-73 (Prentice Hall 1997).

14 In its December 2008 announcement that the current recession began in December 2007, the NationalBureau of Economic Research noted that payroll employment had declined in every month since December 2007.See National Bureau of Economic Research, Determination of the December 2007 Peak in Economic Activity,available at http://www.nber.org/cycles/dec2008.html (Dec. 11, 2008).

9

• Tax-Credit Bonds

29. As discussed above, the tax-credit bond proposals we examine call for theSecretary of the Treasury to establish tax credits that allow the bonds to be sold at a zero couponrate, i.e., providing the eligible borrowers with interest-free financing for the eligible projects.We assume that these terms are sufficiently attractive that the bonds would be utilized up to thespecified limits, i.e., $10 billion annually for private tax-credit bonds and $1 billion am-lually forpublic tax-credit bonds. We assume that an equal amount of $10 billion in private sector tax-credit bonds are issued annually. Because public sector projects may take longer to begin than

private sector projects, we assume that no public sector tax-credit bonds are issued in 2009, $1billion is issued in 2010, and $2 billion is issued in 2011 (pursuant to the catch-up provisions ofthe tax proposal in which the $1 billion limit in public sector tax-credit bonds for a subsequentyear is increased if the full amount of the bonds are not issued in a given year).

30. Further, because the proposal calls for the bonds to be used only to financeprojects approved by state public utility commissions (for private bonds) and state governmentsand the U.S. Department of Commerce (for public bonds), we assume that 100 percent of theinvestment that results is incremental, i.e., used for projects that would not otherwise have beenundertaken. Hence, we assume that the effect of both tax-credit bond proposals is to increasetotal investment in FTTH projects by an average of $11 billion annually for three years.

• Other Assumptions

31. Each expensing proposal lowers the after-tax cost of the goods and servicespurchased through broadband provider's capital investments. Under the 100 percent taxexpensing proposal, expenditures are expensed completely in the year they are made. Withoutthe expensing proposal, those expenditures would have been expensed over several yearsaccording to the appropriate depreciation schedule. To estimate the effective decrease in costresulting from the tax expensing proposal, we estimate the net present value (NPV) of theforgone tax savings in future years for the broadband provider resulting from the immediateexpensing of capital in year one under the proposal. We assume that the investment is 15-yeardepreciable property, and the taxpayer follows a half-year convention and applies a 150 percentdeclining balance depreciation method. Therefore, from a $100 investment, we deduct $5.00 fornormal first year depreciation. This leaves $95 to be deducted under broadband expensing. Wethen determine the NPV of a $95 tax deduction, which we estimate at $33.25, assuming a 35percent corporate tax rate. Next, we reduce $33.25 by the NPV of the year 2-15 depreciationdeductions that would have been available in the absence of broadband expensing, equal to$18.17 (using a weighted average cost of capital (WACC) of 10 percent). Reducing $33.25 by$18.17, the remaining $ 15.08 would be the benefit of 100 percent broadband expensing, equatingto 15.08 percent of the total investment. Using a similar calculation for the rural and underservedarea tax incentive, the benefit of 50 percent broadband expensing would be 7.54 percent of thetotal investment.

10

32. To estimate changes in capital expenditures resulting from the lower after-tax costof the products and services purchased by broadband providers due to the expensing proposals,we assume that the elasticity of the broadband providers' demand for those products and servicesis between -0.85 and -2.5. With an elasticity of demand of -0.85, a reduction in the broadbandprovider's cost of expenditures of 1 percent will increase its demand for those products andservices by 0.85 percent. Likewise, an elasticity of -2.5 indicates that a reduction in thebroadband provider's cost of expenditures of 1 percent will increase its demand for thoseproducts and services by 2.5 percent.

33. Finally, all of our estimates assume continuation of the current regulatoryenvironment for broadband deployment and access. Any additional regulations, such as openaccess riles for FTTH, would decrease our estimates of broadband investments and their directeffects on economic output and employment.

B.

Direct Effects of 100/20 Mbps Expensing (100 percent)

34.

Table 3 shows our estimates of the direct effect of increased capital expendituresin FTTH if the 100/20 Mbps broadband expensing proposal is implemented for 2009-2011.

TABLE 3: DIRECT ECONOMIC EFFECT OF 100/20 MBPS TAX EXPENSING PROPOSAL

2009 2010 2011 Total

FTTH Capital Expenditures before4.031 4.314 4.651 12.996Tax Proposal ($Billion)

FTTH Capital Expenditures after4.548 - 5.551 4.867 - 5.940 5.247 - 6.405 14.662 - 17.896Tax Proposal ($Billion)

Increase in Capital Expenditures0.517 - 1.520 0.553 - 1.627 0.596 - 1.754 1.666 - 4.900($Billion)

Direct Effect on GDP ($Billion) 1.617 - 4.757 1.731 - 5.090 1.866 - 5.488 5.214,- 15.334Direct Effect on Employment

10 204 - 30 012 10 919 - 32 114 11 772 - 34 624 10 965 - 32 250(Jobs), , , , , , , ,

35.

As Table 3 shows, we estimate that the 100/20 Mbps expensing proposal willincrease capital expenditures on FTTH by between $1.7 billion and $4.9 billion from 2009 to2011. This increase will directly result in an increase in GDP of between $5.2 billion and $15.3

billion over the three years. On average over the three years, the increased investment willmaintain an additional 10,965 to 32,250 jobs per year.

C.

Direct Effects of 5/1 Mbps Expensing (50 percent)

36.

Table 4 shows our estimates of the direct effect of increased capital expendituresin FTTH if the 5/1 Mbps broadband expensing proposal is implemented for 2009-2011.

11

TABLE 4: DIRECT ECONOMIC EFFECT OF 511 MBPS TAX EXPENSING PROPOSAL

Cable/DSL Capital Expenditures beforeTax Proposal ($Billion)

Cable/DSL Capital Expenditures afterTax Proposal (Million)

Increase in Capital Expenditures(Million)

Direct Effect on GDP ($ Billion)Direct Effect on Employment (Jobs)

37.

As Table 4 shows, we estimate that the 5/1 Mbps expensing proposal will increasecapital expenditures on cable and DSL by between $375 million and $ 1.1 billion from 2009 to

2011. This increase will directly result in an increase in GDP of between $1.1 billion and $3.1

billion over the three years. On average over the three years, the increased investment willmaintain an additional 1,840 to 5,413 jobs per year.

D.

Direct Effects of Private Sector Tax-Credit Bonds

38.

Table 5 shows the direct effect on the economy of $10 billion in additionalinvestment on FTTH each year from 2009 to 2011 that results from the proposed private sectortax-credit bonds.

TABLE 5: DIRECT ECONOMIC EFFECT OF PRIVATE SECTOR TAX-CREDIT BONDS

2009 2010 2011 TotalFTTH Capital Expenditures before Tax

4.031 4 314 4 651 12 996Proposal ($Billion)FTTH Capital Expenditures after Tax

14.031

.

14.314

.

14 651

.

42 996Proposal (Million)Increase in Capital Expenditures

10.000 10.000

.

10 .000

.

30.000($Billion)Direct Effect on GDP ($Billion) 31.293 31.293 31.293 93.878Direct Effect on Employment (Jobs) 197,437 197,437 197,437 197,437

39.

As Table 5 shows, we estimate that the private sector tax-credit bond proposal

will increase capital expenditures on FTTH by $30 billion from 2009 to 2011. This increase willdirectly result in a $93.9 billion increase in GDP over the three years. On average over the threeyears, the increased investment will maintain an additional 197,437 jobs per year.

E.

Direct Effects of Public Sector Tax-Credit Bonds

40.

Table 6 shows the direct effect on the economy of the additional investment onFTTH each year from 2009 to 2011 that results from the public sector tax -credit bonds.

12

2009

2010

2011

Total

3.076

2.931

2.619

8.626

3.200 - 3.441

3.059 - 3.307

2.742 - 2 .980

9.001 - 9.728

0.124 - 0.365

0.128 - 0.376

0.123 - 0.360

0.375 - 1.102

0.349 - 1.025

0.359 - 1.054

0.344 - 1.012

1.051 - 3.091

1,831 - 5,385

1,883 - 5,539

1,807 - 5,314

1,840 - 5,413

TABLE 6: DIRECT ECONOMIC EFFECT OF PUBLIC SECTOR TAX-CREDIT BONDS

2009 2010 2011 TotalFTTH Capital Expenditures before Tax

4.031 4.314 4 651 12 996Proposal ($Billion)FTTH Capital Expenditures after Tax

4.031 5.314

.

6 651

.

15 996Proposal (Million)Increase in Capital Expenditures

0.000 1.000

.

2.000

.

3 000($Billion) .

Direct Effect on GDP ($ Billion) 0.000 3.129 6.259 9.388Direct Effect on Employment (Jobs) 0 19,744 39,487 19,744

41.As Table 6 shows, we estimate that the public sector tax-credit bond proposal will

increase capital expenditures on FTTH by $3 billion from 2009 to 2011. This increase willdirectly result in a $9.4 billion increase in GDP over the three years. On average over the threeyears, the increased investment will maintain an additional 19,744 jobs per year.

V. IMPACT ON TAX REVENUES

42.The impact on tax revenues of the expensing proposals is dependent upon the

change in investment and the change in the timing of expensing. When a firm incurs additionalcosts, it will be able to deduct those costs from its taxable income, thereby reducing the firm'stax liability. Although changes in the timing of expensing will reduce tax revenues in the short-run, (undiscounted) tax revenues over the life of the investment will be unchanged as long as theamount invested does not change, and assuming the firm's marginal tax rate remains constantover time.

43. We estimate the forgone tax revenues resulting from the proposed tax expensingincentives by calculating the annual tax savings each firm enjoys both with and without theincentive. A firm's tax savings in year t (tax,) from any investment originally made in year k(invk) can be written as:

tax, = (invk * taxrate, * exp_rate,_k) + (invk * taxrate, * (1 -exp_ratek) * dep_rate, )

Part (a) represents the tax savings from an expensing rate of exp_rate in the year of theinvestment. Part (b) represents the tax savings from the depreciation schedule where dep_rate, isthe percent of the investment remaining after expensing that is depreciated in year t. With no taxincentives, the expensing exp_ratek rates is zero. With the 100 percent expensing proposal, invkincreases (relative to no tax incentive) and exp_ratek is 100 percent. With the 50 percentexpensing proposal, invk increases (relative to no tax incentive) and exp_ratek is 50 percent. Weassume a 35 percent marginal tax rate taxrate, when estimating the tax revenue impact.

13

(a)

44. The forgone tax revenues resulting from the tax -credit bond proposals arefunctions of interest rates and tax rates. The effective interest rate on private borrowings under

the tax-credit bond proposal will reflect two factors. First, since interest on the bonds willeffectively be paid by the U.S. Treasury (in the form of tax credits), the default risk on theinterest component is effectively zero. Second, the default risk on the principal will be a functionof the risk characteristics of the issuers, which may range from major U.S. corporations tosmaller (and hence riskier) companies. For purposes of arriving at an estimate of the forgone taxrevenues, we assume that these two factors result in an effective interest rate of 4.14 percent,equal to the average of the current yield for 10-year (5.5 percent) and 20-year (5.98 percent) A-rated corporate bonds and the current yield for 10-year (2.16 percent) and 20-year (2.92 percent)Treasury bonds. 15 The forgone tax revenues in each year until maturity resulting from the privatetax-credit bond proposal is equal to the effective interest rate multiplied by the amount issued.

45. The effective interest rate on public borrowings under the tax-credit bondproposal will reflect two factors. First, since interest on the bonds will effectively be paid by theU.S. Treasury (in the form of tax credits), the default risk on the interest component is effectivelyzero. Second, the default risk on the principal is a function of the risk characteristics of theissuers, which may range from state governments to local municipalities. For purposes ofarriving at an estimate of the forgone tax revenues, we assume that these two factors result in an

effective interest rate of 3.94 percent, equal to the average of the current yields on 10-year (4.81percent) and 20-year (5.87 percent) A-rated municipal bonds and the current 10-year (2.16percent) and 20-year (2.92 percent) Treasury yields as of December 22, 2008.16 The forgone taxrevenues in each year until maturity resulting from the public tax-credit bond proposal is equal tothe effective interest rate multiplied by the amount issued.

46. Table 7 shows the estimates of forgone tax revenues resulting from the taxincentives and changes in capital expenditures. Table 7 shows both the impact on tax revenuesfrom 2009 -2011 and the impact on revenues over the entire life of the investments made in 2009-2011.17 Following the Joint Committee on Taxation, we do not discount the tax revenue cost ofthe proposals. t 8

15 Yahoo! Finance, Composite Bond Rates (http://finance.yahoo.com/bonds/composite _bond_rates); FederalReserve

Board,

Federal

Reserve

Statistical

Release

H.15,

Selected

Interest

Rates(11ttP:/.'www .federalreserve.s?ovireleases:'11.1.5/data.htm). Rates as of December 22, 2008.

16

Id.

" For tax-credit bonds, we calculate forgone tax revenues based on the Joint Committee on Taxation's usualmethod of estimating tax effects over a ten -year budget window, rather than the entire life of the bonds.

18 Joint Committee on Taxation, Overview of Revenue Estimating Procedures and Methodologies Used by theStaff of the Joint Committee on Taxation (Feb. 2, 2005), at 12 (http: //www.house.gov/jct/x-1-05.pdf).

14

TABLE 7: IMPACT OF TAX INCENTIVE PROPOSALS ON TAX REVENUES ($BILLIONS)Tax Revenue

Reduction over Entire

2009-2011 Tax

15-Year Life of 2009-Proposal

Revenue Reduction

2011 Investments*100% Expensing for 100/20 Mbps

4.506 - 5.638

0.583 - 1.71550% Expensing for 5/1 Mbps (Rural/ Underserved Areas only)

1.363 - 1.508

0.131 - 0.386Private Sector Tax-Credit Bonds

2 .484

11.178Public Sector Tax-Credit Bonds

0 .158

0.985Forgone revenues in this column for tax-credit bonds represent interest payments over ten years from 2009-2018.

47. As Table 7 shows, the proposed 100 percent expensing proposal's effect onincreased capital expenditures reduces 2009-2011 tax revenues by between $4.5 billion and $5.6billion. The effect over the entire life of the increased investments made in 2009-2011 is between$583 million and $1.7 billion for the 100 percent expensing proposal. The effect over the entirelife of the investments is smaller than the effect over 2009 to 2011 because the Treasury receivesmore in tax revenues in the years after 2011 under 100 percent expensing than it does without100 percent expensing. When 100 percent of an investment is expensed in the first year, therewill be no more investment to deduct from future years earnings. Without 100 percent expensing,there are depreciated costs to deduct from earnings in every year through year 16 of theinvestment.

48. By focusing only on firms' increased expenses, Table 7 overstates the true netimpact of the various tax proposals on tax revenues. We do not attempt to estimate the increasein tax revenues that would result from the tax incentives in our analysis. For example, increasedemployment through the direct effects would result in increased personal incomes, which wouldresult in increased income tax revenues. In addition, firms making the investments would seetheir profits increase through greater consumption of their broadband services, which wouldincrease their corporate income taxes. The Joint Committee on Taxation (JCT) recentlyestimated the combined cost of the 100/20 Mbps expensing provision and the 5/1 Mbpsexpensing provision to be $72 million over ten years for a three-year provision. In making itsrevenue impact calculations, the JCT generally accounts for income effects and other indirecteffects (discussed below) not included in Table 7 that increase tax revenues.

VI. ANALYSIS OF INDIRECT EFFECTS

49. This study focuses on the direct effects on the economy of each tax proposal. Inaddition to these direct effects, the additional availability of broadband services will result inincreased adoption, which in turn will lead to increased productivity and demand for other goodsand services ("indirect effect"). The indirect effects of increased broadband investment resultfrom the productivity increases, price reductions, and related savings associated with increasedbroadband adoption. The tax incentives at issue here would increase broadband adoption due toboth (a) increased broadband availability in rural and underserved areas and (b) reduced pricesand improved quality associated with the availability of more technologically advancedbroadband infrastructures generally. Our estimate utilizes reasonable assumptions regarding the

15

impact of increased availability, and applies the results of authoritative empirical research on theimpact of broadband adoption on employment to estimate these indirect effects. In this section,we estimate the indirect effects from increased broadband adoption resulting from the increaseddeployment that broadband providers will make as a result of the tax proposals discussed above.

A.

Methodology and Assumptions

50. In our analysis of the direct effects of the tax proposals, we estimated the effectsof each proposal that result directly from increased investment in broadband infrastructure. Theultimate effect of this investment, however, will be to increase the availability of next-generationbroadband services to households which already have some form of broadband available, and tomake broadband available in rural and underserved areas where broadband service is unavailabletoday.

51. We model the adoption effect of increased high-speed broadband (100/20Mpbs)as an effective reduction in the price, where price is measured as the monthly cost perdownstream megabit.' As shown in Table 8 below, the price per megabit for high speed servicesis far lower than for slower DSL and cable connections.

TABLE 8: COMPARISON OF BROADBAND SPEEDS AND PRICES

Provider Service Type Download S peed Monthly Price $/Mb sCox Cable 768 Kbps $19.89 $25.90

Verizon DSL 768 Kbps $19.99 $26.03

Qwest DSL 1.5 Mbps $14.99 $9.99

AT&T DSL 1.5 Mb s $25.00 $16.67

Cox Cable 1.5 Mbps $29.99 $19.99

AT&T DSL 3.0 Mb s $29.95 $9.98Verizon DSL 3.0 Mbps $29.99 $10.00

AT&T DSL 6.0 Mb s $35.00 $5.83

Comcast Cable 6.0 Mbps $57.95 $9.66Qwest DSL 7.0 Mbps $24.99 $3.57

Comcast Cable 8.0 Mb s $67.95 $8.49Cox Cable 9.0 Mbps $43.99 $4.89

Verizon FiOS 10 Mb s $47.99 $4.80

EarthLink Cable 10 Mbps $72.95 $7.30

Qwest DSL 12 Mb s $46.99 $3.92Cox Cable 15 Mbps $56.95 $3.80Verizon FiOS 20 Mbps $57.99 $2.90

Verizon FiOS 50 Mb s $144.95 $2.90Source: Company websites.

19 Price per megabit is a widely utilized measure of broadband pricing, since it captures the "quality" elementassociated with higher speed services. See, e.g., http:/,-"www.oecd.or<,, /sti/ict/broadband.

16

52. We estimate conservatively that the effect of 100/20 Mbps fiber deployment in anarea already served by broadband is to reduce the average price of broadband in that area by$3.67 per month per megabit, i.e., approximately the difference between an average of thecurrent pricing plans for 3 Mbps - 15 Mbps ($6.57/Mbps/month) and Verizon's current 50 Mbpsplan ($2.90/Mbps/month).

53. To estimate the effect of reduced prices on broadband penetration in these areas,we rely on Atkinson, et al, who find that a $1 /month reduction in price per megabit increasesbroadband penetration by 2.4 percentage points .20 We assume the full effect of reduced priceswould be felt over four years, beginning once the deployment has been made (i.e., at the end ofeach year). Thus, a $3.67 reduction in price /Mbps would result in an 8.81 percentage pointincrease in broadband penetration by the end of the third year of our projection period.21

54. The impact of increased availability of any type of broadband can be estimatedmore directly. According to Morgan Stanley, the national residential broadband penetration rate

is approximately 56 percent of all households as of 2009, and is forecasted to increase to 61.1percent as of 2011.22 We assume that households who receive broadband availability as a resultof the rural/underserved tax expensing proposal will begin subscribing to broadband in the yearfollowing deployment, and that once subscriptions begin, they will subscribe to broadband at the

national average rate over the course of three years, i.e., that 20 percent of households willsubscribe in the first year, 40 percent in the second year, and 60 percent in the third year. Underthis assumption, 20 percent of all homes passed by broadband for the first time as a result of therural/underserved tax expensing proposal would be subscribers as of 2011. In addition, weassume that 10 percent of all homes passed by fiber as a result of the various 100/20 Mbpsproposals would be located in areas that would not have broadband availability without theexpanded fiber deployment. Therefore, we assume that 20 percent of those newly passed homesbecome broadband subscribers by the end of 2011.

55. Finally, to estimate the impact of increased broadband penetration onemployment, we rely on the results of a 2007 study published by the Brookings Institution. Inthat study, Robert Crandall, William Lehr and Robert Litan found that a one percentage pointincrease in broadband population penetration (defined as broadband lines per person) will

20 Robert D. Atkinson, Daniel K. Correa, and Julie A. Hedlund, Explaining International BroadbandLeadership, Information Technology and Innovation Foundation (May 2008)

21 For example, if the number of households passed by FTTH increased by 1,000 as a result of one of theproposals we examined, we estimate that 88.1 additional households become subscribers during the period of ourprojection.

72 Simon Flannery, Benjamin Swinburne, David Gober, Daniel Gaviria, & Chad Harris, Morgan Stanley,Cable/Sat & Telecom Broadband Outlook: Online Usage Growth Favors Cable, DirecTV Remains HD Leader (July18, 2008), at Ex. 26.

17

increase private, nonfarm employment by 293,200 jobs (when the economy is not at full23employment).

B.

Results of Indirect Effects Analysis

56. Table 9 shows the results of our analysis of the effects of each proposal onbroadband adoption, and the resulting indirect economic effects on job creation. Specifically, wefind that the various proposals would increase the number of U.S. broadband subscribers bybetween 268,800 and 3.39 million, increase the U.S. broadband penetration rate (defined asbroadband subscriber lines per person) by between 0.09 percent and 1.08 percent, and increaseemployment by between 25,160 jobs and 317,000 jobs.

TABLE 9: SUMMARY OF INDIRECT EFFECTS ON JOBS CREATION, 2009-2011


50% Expensing for5/1 Mbps


PrivateSector Tax-

CreditBonds

Public SectorTax Tax-credit

BondsAdditional Homes Passed (000)-

Fiber 2,995.1 - 6,552.5 34,114.2 4,523.5-

Any Broadband 299.5 - 655.3 1,343.9 - 3,952.7 3,411.4 452.4Additional Subscribers (000)-

Fiber 297.3 - 650.5 3,386.6 449.1-

Any Broadband 297.3 - 650.5 268.8 - 790.5 3,386.6 449.1Increase in Overall U.S.Broadband Population 0.09% - 0.21% 0.09% - 0.25% 1.08% 0.14%Penetration Rate 24Additional Jobs 27,831 - 60,888 25,160 - 73 ,999 317 ,000 42,034

VII. CONCLUSION

57. In this study, we have calculated the total economic impact of four different taxincentive proposals relating to increasing broadband deployment and adoption. We find that eachof the four proposals generates substantial benefits to the U.S. economy through both increasedGDP and increased employment. Each of the tax proposals would directly result in thousands ofadditional jobs sustained per year from 2009 to 2011. The number of new jobs sustained from2009 to 2011 resulting directly from the private sector tax-credit bond proposal alone is as high

23 Robert Crandall, William Lehr, & Robert Litan, The Effects of Broadband Deployment on Output &Employment. A Cross Sectional Analysis of U.S. Data, 6 ISSUES IN ECONOMIC POLICY 12-14 (July 2007).

24 Based on Morgan Stanley's baseline forecast of 75.156 million residential broadband subscribers in 2011and the U.S. Census Bureau's U.S. population forecast of 313.2 million in 2011. Simon Flannery, BenjaminSwinburne, David Gober, Daniel Gaviria, & Chad Harris, Morgan Stanley, Cable/Sat & Telecom BroadbandOutlook: Online Usage Growth Favors Cable, DirecTV Remains HD Leader (July 18, 2008), at Ex. 26; U.S. CensusBureau,

U.S.

Population

Projections,

National

Population

Projections

(Released

2008)(http://www.census. gov/population/www/projections/downloadablefiles.html).

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as 197,437. These proposals result in even further job creation through their indirect effect ofincreased broadband adoption. Given these proposals' relatively small impact on tax revenuescompared to the large resulting increases in GDP and employment, their long-run benefits inincreasing productivity and competitiveness, and their significant and virtually immediate impacton economic activity,2' the adoption of any of these proposals would create substantial netbenefits to the U.S. economy.

25 For a discussion of the importance of timing in the effectiveness of fiscal stimulus policies, see Peter R.Orszag, Options for Responding to Short-Term Economic Weakness, Testimony Before the Committee on Finance,United States Senate (January 22, 2008), especially at 5 ("The timing of fiscal stimulus is critical. If the policies do

not generate additional spending when the economy is in a phase of very slow growth or a recession, they willprovide little help to the economy when it is needed.") and at 8 ("Tax cuts for business investment may be moreeffective in boosting short-term demand if they are temporary than if they are permanent. Firms may view them asone-time opportunities for tax savings, which may induce firms to move up some of their fixture investment plans tothe present.")

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broadband infrastructure deployment appendix ii - empiris llc

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